This legislation significantly reshaped retirement savings laws, particularly concerning how distributions are managed for beneficiaries of retirement accounts inherited in 2020 or later, especially non-spousal ones. The new rules, effective in 2025, address longstanding questions about the interpretation of the 10-year rule, which mandates that most retirement plan and IRA beneficiaries must fully deplete the inherited account within ten years of the account holder’s death. These regulations impact beneficiaries and their strategies for managing inherited retirement accounts. Here’s a detailed look at the finalized RMD regulations for inherited retirement plans and IRAs.
This piece is only applicable to accounts inherited after 12/31/19. Other rules apply to accounts inherited prior to 2020.
Overview
With the SECURE Act, enacted in December 2019, beneficiaries of inherited retirement accounts (for account owners who died in 2020 or later) have effectively been sorted into three different groups:
1. Eligible Designated Beneficiaries
- Surviving Spouse
- Minor Child of the Decedent (Less than 21 years of age)
- Disabled or Chronically Ill Individual
- An individual who is not more than 10 years younger than the decedent
2. Non-Eligible Designated Beneficiaries
- Non-spouse beneficiary who is more than 10 years younger than the original owner and is not a minor child of the decedent (essentially any person who does not qualify as an eligible designated beneficiary)
3. Non-Designated Beneficiaries
- Estate (if no beneficiary is listed)
- Charity
- Entities
- Non “See-Through” Trusts
The 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 (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 required minimum distributions (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.
Treatment of Inherited IRA RMDs for Non-Eligible Designated Beneficiaries
The most notable change that came from the SECURE Act and July’s subsequent IRS guidance, certain to impact many of our clients, is the 10-year distribution rule, requiring most non-spouse beneficiaries (non-eligible designated beneficiaries, or NEBDs) to withdraw the entire inherited balance within ten years of the account owner’s death. In most cases, if you are a non-disabled, non-minor child inherited from a parent, this applies to you. As a reminder, this change only applies to retirement accounts inherited after December 31st, 2019.
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:
- Inherited from Owners Who Died Before Required Minimum Distribution (RMD) Age: Must withdraw the entire balance by the end of the 10th year after death.
- Inherited from Owners Who Died On/After Required Minimum Distribution (RMD) Age: Must take annual RMDs for the first nine years, with the remaining balance due by the end of the 10th year.
Inherited from Owners Who Died Before Required Minimum Distribution (RMD) Age
The key distribution rules for non-eligible designated beneficiaries who inherit a retirement account from an owner who dies prior to their (RMD) age are as follows:
- Complete Distribution by Year 10: Beneficiaries must ensure that the entire IRA balance is distributed by December 31st of the 10th year following the account owner’s death.
- No Annual RMDs Required: Non-eligible designated beneficiaries are not obligated to take annual distributions during the 10-year period after the account owner’s death.
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.
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.
Take the following example:
Situation: In 2024, Judy (age 67), passes away with an IRA balance of $400,000, and her daughter, Lindsay (age 42), is the beneficiary. Judy had not yet reached her RMD age (age 73 under SECURE Act 2.0).
Application of SECURE Act 2.0:
- 10-Year Rule: Lindsay must withdraw the entire IRA balance within 10 years of her mother’s death (by December 31st, 2034). There are no annual distribution requirements during this period.
- Possible Withdrawal Strategies:
– Lindsay decides to take a pro-rata distribution from the inherited IRA over all ten years to spread out her tax liability.
– Lindsay decides to take out $40,000 each year for the first four years to help fund her children’s education.
– Lindsay is a high earner and plans to retire in five years. Lindsay decides to not take any distributions until her retirement, then spread out distributions over the final five years to avoid a large tax hit in a single year.
Inherited from Owners Who Died On/After Required Minimum Distribution (RMD) Age
The key distribution rules for non-eligible designated beneficiaries who inherit a retirement account from an owner who dies on or after their (RMD) age are as follows:
- Complete Distribution by Year 10: Beneficiaries must ensure that the entire IRA balance is distributed by December 31st of the 10th year following the account owner’s death.
- Annual RMDs Required: Beginning in 2025, non-eligible designated 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 NEBDs 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 IRA if they choose, but they must empty the account within 10 years of the owner’s death.
Take the following example:
Situation: Sean, age 75, passes away in 2024 with an IRA worth $250,000. His son, Liam, is the beneficiary. Sean had been taking his RMDs.
Application of SECURE Act 2.0:
- 10-Year Rule and “Stretch” RMD: Liam must withdraw the entire balance within 10 years. However, since Sean was already taking RMDs, Liam must continue to take RMDs based on his own life expectancy.
- Possible Withdrawal Strategies:
– Liam calculates his RMDs for each year based on IRS tables and decides to take out those amounts annually, which helps him manage his tax liability effectively. He then distributes the remaining account balance in year 10.
– Liam decides to take a pro-rata distribution from the inherited IRA over all ten years to spread out his tax liability.
Annual RMDs Waived Until 2025
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/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). Key points regarding these waivers include:
- Annual RMD Waived: The annual RMD requirement is waived for the years 2021, 2022, 2023, and 2024. Starting in 2025, non-eligible designated beneficiaries who inherit from account owners who had begun RMDs will need to comply with the stretch RMD rules.
- 10-Year Distribution Rule: The 10-year clock for full distribution of the inherited IRA 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.
- No Penalties for Missed Distributions: Beneficiaries who missed distributions during these years face no penalties and are not required to make up missed distributions.
Take the following example:
Situation: Nancy (age 62) is the healthy daughter of Virginia (age 83) who passed away in 2021. Virginia was the owner of an IRA worth $500,000, which was left to Nancy. At the time of her death, Virginia was 83 and subject to required minimum distributions from her IRA.
Application of SECURE Act 2.0:
- 10-Year Rule and “Stretch” RMD: Nancy must withdraw the entire balance within 10 years. However, since Virginia was already taking RMDs, Nancy must continue to take RMDs based on her own life expectancy.
- RMDs from 2022-2024: Because of the confusion around the SECURE Act, Nancy has not yet taken any distributions from her inherited IRA. However, IRS Notices 2022-53, 2023-54, and 2024-35 state that not only will Nancy not be subject to any penalty for failing to take annual stretch RMDs for 2022, 2023, or 2024, additionally she does not have to make them up. However, beginning in 2025, Nancy must take annual stretch RMDs from the traditional IRA to comply with the rules mandated by the July 2024 final regulations, in addition to fully depleting the traditional inherited IRA by December 31, 2031, the 10th year after her mother’s death.
- Possible Withdrawal Strategies:
– Beginning in 2025, Nancy calculates her RMDs for each year based on IRS tables and decides to take out those amounts annually, which helps her manage her tax liability effectively. She then distributes the remaining account balance by December 31, 2031 (year 10).
– Nancy decides to take a pro-rata distribution from the inherited IRA between 2025 and 2031 to spread out her tax liability.
Inherited IRA RMDs for Roth Accounts for Non-Eligible Designated Beneficiaries
When a non-eligible designated beneficiary inherits a Roth IRA, because Roth IRAs are not subject to RMDs, you are only subject to the 10-year rule for that specific Roth account. RMDs are not required, regardless of if the decedent passed prior to or on/after their RMD age.
Take the following example:
Situation: Gordon (age 58) inherited a Roth IRA from his father, Carl (age 85) when he passed in 2024.
Application of SECURE Act 2.0:
- 10-Year Rule: Gordon must withdraw the entire balance within 10 years.
- Possible Withdrawal Strategies:
– Gordon does not take any distributions from the Roth IRA from years 1-9 and distributes the total balance in year 10. This allows for the possibility of the entire Roth IRA account balance to grow tax free for the maximum allowed time.
Treatment of Inherited IRA RMDs for Eligible Designated Beneficiaries
Certain beneficiaries, categorized as “eligible designated beneficiaries”, retain the right to stretch distributions over their life expectancies. An easy way to think about this is an eligible designated beneficiary is “eligible to stretch their RMDs”. As a reminder, eligible designated beneficiaries include:
- Surviving Spouse
- Minor Child of the Decedent (Less than 21 years of age)
- Disabled or Chronically Ill Individual
- An individual who is not more than 10 years younger than the decedent
For these eligible designated beneficiaries, the ability to stretch distributions allows for the possibility of continued tax-deferred growth and potentially lower tax burdens.
With the SECURE Act, these Eligible Designated Beneficiaries have been segmented into two groups, based on the timing of death of the original owner of the retirement account:
- Inherited from Owners Who Died Before Required Minimum Distribution (RMD) Age: Beneficiary has the choice to stretch distributions OR use the 10-year rule. If the beneficiary elects to stretch, they must begin taking RMDs by December 31 of the year following the original account owner’s death. These RMDs are calculated based on the beneficiary’s life expectancy, thus extending the period of possible tax-deferred growth. Of note, an employer-sponsored retirement plan may eliminate a beneficiary’s choice and can require such beneficiaries to use either the stretch method or the 10-year rule (a good reminder that it is always important to know what your plan rules are).
- Inherited from Owners Who Died On/After Required Minimum Distribution (RMD) Age: Beneficiary must stretch distributions and begin taking RMDs by December 31 of the year following the original account owner’s death. These RMDs are calculated based on the beneficiary’s life expectancy, thus extending the period of possible tax-deferred growth.
Take the following examples:
Situation 1: Robert, age 62, passes away leaving an IRA to his disabled niece, Emily, who qualifies as an eligible designated beneficiary. At age 62, Robert had not yet reached his RMD age.
Application of SECURE Act 2.0:
- “Stretch” or 10-Year Rule: Emily can elect to stretch her RMDs or follow the 10-year rule
- Possible Withdrawal Strategies:
– Emily chooses to withdraw a portion of the IRA annually based on her life expectancy, providing her with a consistent income stream while minimizing tax liability.
– Emily elects to use the 10-year rule because she does not want any extra taxable income from inherited IRA distributions in years 1-9. Instead, she holds off on any distributions until year 10, at which point she withdraws the entire account balance.
Situation 2: Tom (age 70) inherits his brother’s (age 78) IRA. Tom is less than 10 years younger than his brother, which qualifies Tom as an eligible designated beneficiary.
Application of SECURE Act 2.0:
- “Stretch” RMDs: Tom must take distributions over his life expectancy, providing him with a consistent income stream while minimizing tax liability.
- Withdrawal strategy: Tom is required to withdraw a portion of the IRA annually based on his life expectancy.
Considerations for Minor Children Eligible Designated Beneficiaries
A minor child, for eligible designated beneficiary purposes, is considered any child of the decedent that is below the age of 21 years, regardless of their state of residence or school status. As an eligible designated beneficiary, the minor child has the option to stretch the RMDs over their life expectancy. However, once a minor child reaches the age of majority (21 years), they transition from being an eligible designated beneficiary to a non-eligible designated beneficiary. They will then be subject to the 10-year rule for any remaining balance in the inherited IRA, requiring them to empty the account within the next 10 years. Additionally, the (formerly) minor child must continue taking annual stretch RMDs during the period covered by the 10-year rule, regardless of whether the decedent died before, on, or after their RMD age.
Special Rules for Surviving Spouses
The final regulations of SECURE 2.0 confirmed a new distribution option for surviving spouses. In this new option, for surviving spouses whose first RMDs begin in 2024 or later, the surviving spouse now can elect to be treated as the deceased spouse and to delay RMDs until the year the deceased spouse would have been required to begin taking them.
Effectively, then, there are now four different options for surviving spouses:
- Make the spousal rollover: roll the decedent’s account into their own IRA.
- Keep the inherited account separate from their own IRA but elect to treat it as their own.
- Leave the account as inherited and remain an eligible designated beneficiary subject to “stretch” RMDs based on the beneficiary’s life expectancy, using the Single Life Table to establish their initial life expectancy used to calculate RMDs.
- Leave the inherited account in the decedent’s name and elect to be treated as if the surviving spouse were the decedent for RMD purposes. In other words, RMDs begin when the decedent would have begun distributions, but may be calculated using the surviving spouse’s age. In this option, the surviving spouse is allowed to use the Uniform Lifetime Table, rather than the Single Life Table, to establish their initial life expectancy used to calculate RMDs. As noted above, this option is only available for surviving spouses whose first RMDs begin in 2024 or later.
This new Spousal Election option provides surviving spouses with more flexibility in managing inherited retirement accounts. By essentially combining features of both the spousal rollover and inherited account options, the new spousal election allows for:
- Use of the Uniform Lifetime Table to calculate RMDs based on the surviving spouse’s age (generally more favorable than the Single Life Table when calculating RMDs, as it typically results in a longer life expectancy and therefore smaller annual distributions for the account owner).
- Delayed RMDs until the decedent would have reached their RMD age.
- Penalty-free withdrawals prior to age 59½, similar to the inherited account option.
However, more flexibility can also mean more options to weigh before deciding! Determining the “best” choice usually depends on individual circumstances. The following can be considered when choosing a strategy for RMDs as a surviving spouse:
- Younger Surviving Spouse & Decedent Passed Prior to Reaching RMD Age: A spousal rollover is generally preferable. However, if they are under 59½ and need to access the funds, delaying the rollover may be beneficial.
- Older Surviving Spouse & Decedent Passed Prior to Reaching RMD Age: It may be advantageous to keep the account as inherited to delay RMDs until the decedent’s RMD age. Rolling over before RMDs start can preserve flexibility for future beneficiaries.
- Same Age or Older Surviving Spouse or Decedent Passed After RMD Age: RMDs will be the same regardless of rollover or inherited status. Other factors, such as beneficiary considerations, will influence the decision. If the surviving spouse is significantly older (10–12 years), RMDs may be lower if the account is left as inherited.
Proposed Spousal Rollover Election Deadline Removed
The Final Regulations reneged on the originally proposed regulation establishing a deadline to make a spousal rollover. Sticking with the status quo, surviving spouses maintain the ability to roll over a retirement account inherited from their spouse into their own retirement account at any time.
Introduction of Hypothetical RMDs
As an eligible designated beneficiary, if a surviving spouse were to inherit their deceased spouse’s retirement account prior to the decedent having reached their RMD age, they would have the option to choose the 10-year rule for distributions. The IRS wants to discourage surviving spouses from delaying RMDs by electing the 10-year rule and then switching to the spousal rollover option, so the finalized regulations confirmed that “hypothetical RMDs” will now be required. in which a surviving spouse will have to retroactively make up any “missed” RMDs. Say a surviving spouse originally goes with the 10-year rule option. If they later choose to switch to the spousal rollover option and treat the decedent’s retirement account as their own, they are now required to retroactively make up any RMDs they would have been required to take had they elected the spousal rollover from the get-go. Take the following example:
Situation: Carol and Richard were each 70 years old when Richard died. Carol inherits Richard’s IRA after his passing. At age 70, Richard died prior to his RMD age.
Application of SECURE Act 2.0:
- 10-Year Rule: Carol is still working at the time of Richard’s death and does not need any money from his IRA, nor does she want the extra taxable income. Because Richard died prior to his RMD age, Carol is eligible to use the 10-year rule and is not required to make any distributions from the IRA until the tenth year following Richard’s death.
- Switch to Spousal Rollover: In the tenth year after Richard’s death, Carol decides that she does not want to have to take a big tax hit and fully distribute the inherited IRA. Because there is no deadline for rolling over an IRA inherited from a spouse, Carol now elects make a spousal rollover to avoid having to deplete the full IRA value per the 10-year rule.
- Application of Hypothetical RMDs: Carol is permitted to switch to the spousal rollover option, but she first must make up any missed RMDs. The amount of these RMDs is determined based on the distribution Carol would have been required to take in every year since Richard’s death, had she elected the spousal rollover to begin with.
Treatment of Inherited IRA RMDs for Non-Designated Beneficiaries
No sweeping changes were made to the final category of inherited retirement account beneficiaries. As a reminder, non-designated beneficiaries are defined as follow:
- Estate (if no beneficiary is listed)
- Charity
- Non See-Through Trusts
These Non-Designated Beneficiaries have been segmented into two groups, based on the timing of death of the original owner of the retirement account:
- Inherited from Owners Who Died Before Required Minimum Distribution (RMD) Age: Must withdraw the entire balance by the end of the 5th year after death.
- Inherited from Owners Who Died On/After Required Minimum Distribution (RMD) Age: Must stretch distributions over the decedent’s assumed lifespan.
Key Takeaways
The IRS’s finalized regulations on RMDs for inherited IRAs 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.
This piece is only applicable to accounts inherited after 12/31/19. Other rules apply to accounts inherited prior to 2020.
Citations:
IRS New Final Regulations: 10-Year Rule, Beneficiaries, RMDs (kitces.com)
New RMD Rules For Spousal Beneficiaries Of Retirement Accounts (kitces.com)
https://www.thinkadvisor.com/2024/07/19/irs-releases-final-rmd-regs-on-10-year-rule
https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
https://www.federalregister.gov/documents/2024/07/19/2024-14543/required-minimum-distributions
https://www.irs.gov/pub/irs-drop/n-22-53.pdf
https://www.irs.gov/pub/irs-drop/n-23-54.pdf
https://www.irs.gov/pub/irs-drop/n-24-35.pdf
https://www.congress.gov/bill/116th-congress/house-bill/1865
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.
