As we previously reported, the SECURE ACT of 2019 eliminated the ability of non-spouse beneficiaries to “stretch out” an inherited IRA over their own lifetimes, requiring the account to be depleted within ten years. However, exactly how RMD’s must be distributed over the 10-year span has been unclear since passage, confounding retirement savers and financial experts alike. Must a non-spouse beneficiary take an RMD every year, or is it OK to skip annual RMD’s and wait until the 10th year to empty the account? Recognizing the confusion, the IRS has exempted non-spouse beneficiaries from RMD requirements for the years 2021 through 2024.
But next year, 2025, that changes. In July 2024 the IRS issued final regulations clarifying the 10-year rule: For non-spouses who inherited an IRA after January 2020, RMD’s must be taken every year if the original account holder had begun taking RMD’s before passing away. The entire account must be depleted within 10 years.
This 10-year withdrawal rule applies to “non-eligible beneficiaries,” typically adult children of clients. It does NOT apply to:
- Surviving spouses
- Individuals who are considered disabled under IRS rules
- Minor children (under age 21)
- Beneficiaries not more than 10 years younger than the deceased
Some tax experts advise that depending on the specific situation, a non-spouse who inherits an IRA may wish to take more than the minimum RMDs sooner rather than later, in order to minimize the tax impact. That is because in 2026, the Tax Cut and Jobs Act will sunset. Without action from Congress, income tax rates will likely increase.
Regardless of how withdrawals are structured, failing to take the annual RMD or taking less than the minimum amount will incur a 25% penalty on the amount failed to be withdrawn. If you do not presently have a financial expert to assist you, call our law firm at 561-625-1100 and we can provide you with a referral.
You can read the full updated IRA regulations in the Federal Register here. The regulations are 69 pages of fine print and do not take effect until January 2025. There may still be glitches, nuances and ambiguities to be resolved before then. We will update this blog as more information becomes available.
