In the original SECURE Act, enacted in December 2019, designated beneficiaries of inherited retirement accounts for account owners who died in 2020 or later were effectively sorted into two different groups: 

Eligible Designated Beneficiaries, which includes surviving spouses, minor children of the decedent, disabled individuals, chronically ill individuals, and any individual less than ten years younger than the decedent. 

And Non-Eligible Designated Beneficiaries, which includes any non-spouse beneficiary who is more than 10 years younger than the original owner, is not a minor child of the decedent, and is not disabled or chronically ill (essentially any person who does not qualify as an eligible designated beneficiary). Adult children who inherit a retirement account from a parent usually fall into this category. 

This new “non-eligible designated beneficiaries” group was hit with the most significant reform in the treatment of inherited IRAs by eliminating the “stretch” provision. Previously, these beneficiaries could take required minimum distributions (or RMDs) over their life expectancy, allowing for the possibility of tax-deferred growth over many years. Instead, the SECURE Act mandated that these non-eligible designated beneficiaries must withdraw the entire balance of the inherited IRA by December 31st of the tenth year after the owner’s death, known as the “10-Year Rule”. In early 2022, the IRS clarified that if the original account owner had already been taking RMDs prior to their death, not only would the beneficiaries be subject to the 10-Year Rule, but they would also need to take annual RMDs during the 10-year period. This requirement was confirmed in the IRS’s final regulations issued in July 2024. Importantly, the final regulations also stated that there would be no penalties for missed RMDs from 2021 to 2024, effectively making 2025 the starting point for compliance. 

With the new regulations, determining the requirements for an inherited IRA distribution has become, quite literally, a maze of rules, with different rules applying based on whether the decedent had reached RMD age, and the type of beneficiary involved. 

On that note, these Non-Eligible Designated Beneficiaries have been segmented into two groups, based on the timing of death of the original owner of the retirement account: 

For retirement accounts inherited from owners who died before their RMD age, beneficiaries must withdraw the entire balance by the end of the 10th year after death. 

For retirement accounts inherited from owners who died on or after their RMD Age, beneficiaries must take annual RMDs for the first nine years in addition to withdrawing the entire balance by the end of the 10th year after death. 

Let’s start with the first category. The key distribution rules for non-eligible designated beneficiaries who inherit a retirement account from an owner who died prior to their RMD age are: 

1. Beneficiaries must ensure that the entire retirement account balance is distributed by December 31st of the 10th year following the account owner’s death. 
2. Beneficiaries are not obligated to take annual distributions during the 10-year period after the account owner’s death. In other words, no RMDs are required. 

These requirements allow for some withdrawal flexibility, in that beneficiaries can withdraw as much or as little as desired at any time within the 10 years, allowing for strategic planning based on their financial situation. For example, taking distributions in lower-income years can help minimize tax liabilities, whereas spreading withdrawals over as many years as possible may avoid significant spikes in income and tax rates. 

And while annual distributions are not required, this does not necessarily mean that annual distributions should not be taken. Careful planning can help to determine strategies for managing tax implications effectively. Beneficiaries should consider their individual tax situations to optimize their withdrawals and comply with the 10-Year Rule. 

Moving along to the second category, the key distribution rules for non-eligible designated beneficiaries who inherit a retirement account from an owner who died on or after their RMD age are: 

1. Beneficiaries must ensure that the entire IRA balance is distributed by December 31st of the 10th year following the account owner’s death. 
2. Beginning in 2025, beneficiaries are obligated to take annual distributions during the 10-year period after the account owner’s death. These RMDs are calculated using the beneficiary’s life expectancy and the inherited account balance. 

To emphasize, this subset of non-eligible designated beneficiaries who inherit retirement accounts from a decedent that had been subject to RMDs prior to their death is required to comply with both the new 10-Year Rule and the ‘old’ Stretch rules. Stated differently, at a minimum, RMDs must be taken in years 1–9 after the year of death, with the remaining account balance distributed by the end of the 10th year after death. The beneficiary can withdraw larger amounts from the retirement account if they choose, but they must empty the account within 10 years of the owner’s death. 

There is one important caveat to the application of stretch RMDs required for non-eligible designated beneficiaries who inherited a retirement plan from a decedent that died on or after their RMD age. Due to the uncertainty surrounding the SECURE Act legislation, in a series of notices the IRS has waived these annual RMD requirements for the years 2021 through 2024 (as a reminder, there was no RMD requirement in 2020 because of COVID relief). Beneficiaries who missed distributions during these years face no penalties and are not required to make up missed distributions. Starting in 2025, beneficiaries who inherit from account owners who had begun RMDs and died after December 31, 2019 will need to comply with the stretch RMD rules. 

Keep in mind, the 10-year clock for full distribution of the inherited retirement account starts the year after the account owner’s death, regardless of the RMD waiver. Expressed differently, while no intra-10-Year Rule RMDs are required for years prior to 2025, those years are still counted for the 10-Year Rule. The 10-year clock for a beneficiary who inherited a retirement account between 2020–2023 still starts the year after death and not in 2025. 

The IRS’s finalized regulations on RMDs for inherited retirement accounts provide much-needed insight on the rules established by the SECURE Act 2.0. In distinguishing between non-eligible designated beneficiaries and eligible designated beneficiaries and clarifying the application of the 10-Year rule, these regulations offer more flexibility in managing distributions, highlighting the importance of tailored financial strategies, tax planning, and estate planning for different beneficiaries. As the landscape of retirement accounts continues to evolve, staying informed and working closely with a financial professional will be crucial for effective management of inherited IRAs. Our team at Howe & Rusling can help you navigate these financial decisions as the need arises. 

If you are interested in a more detailed synopsis of the finalized SECURE Act rules and how they apply to inherited retirement accounts, please take a look at our blog article Finalized SECURE Act Inherited Retirement Account Rules. 

Disclosures This material is provided for informational and educational purposes only and should not be considered as investment, tax, or legal advice. The information herein reflects our understanding of the SECURE Act and subsequent IRS regulations as of the date of publication. Future regulatory changes or interpretations may affect the accuracy of this information. Please consult a qualified financial or tax advisor for guidance specific to your circumstances. Howe & Rusling does not provide tax or legal advice. For such advice, please consult with a qualified professional. The content is based on publicly available resources, including IRS publications and industry analyses, as referenced in this document. While every effort has been made to ensure the accuracy of the information contained in this document, Howe & Rusling assumes no responsibility for any errors or omissions, or for any outcomes resulting from reliance upon this information. Any examples or illustrations provided are hypothetical and do not represent any actual or anticipated results. Investment outcomes may vary, and past performance is not indicative of future results. Readers are encouraged to conduct their own due diligence and consult with financial professionals when making decisions about inherited IRAs or other retirement accounts.