Beginning January 2025, the final rule is in effect for non-spouses who inherit a qualified plan (IRA, 401k, 403b, 457). If you plan to pass down a qualified plan or expect to inherit one, read on for an explanation.
Background
The 2019 Secure Act (Setting Every Community Up for Retirement Enhancement Act) revised the tax treatment for qualified plans inherited by non-spouses.
Prior to the legislation, a non-spouse who inherited a qualified plan could take annual required minimum distributions (RMDs) based on his/her own life expectancy. This reduced the income tax burden and allowed the account to build over time.
Of course, it also meant the government had to wait longer to get its hands on the tax money generated from withdrawals. Enter the 2019 Secure Act, which required a non-spouse beneficiary to deplete the account within ten years of inheriting it. However, both the public and professionals were confused over how the new rule should be applied: Was the inheritor required to take RMDs annually for each of the ten years? Or did the account simply have to be depleted by the end of the tenth year?
In response to the confusion, the IRS has been waiving penalties for non-spouse beneficiaries who missed taking annual required minimum distributions. Until now, that is.
New Rules Effective January 1, 2025
Now, the rule has been clarified. It impacts a beneficiary who inherits a qualified plan if the beneficiary (1) is not a surviving spouse, child under age 21, or disabled; and (2) the original owner achieved RMD status prior to death.
If you meet these criteria, you must take annual required minimum distributions based on your own remaining life expectancy, as established by IRS tables. If you fail to take RMDs, you will pay a penalty of up to 25% of the RMD you missed. The entire account must be depleted by the end of the tenth year.
Note that the new rule applies only if you have inherited a qualified plan in 2020 or later. If you inherited a plan between 2020 and 2024 and missed taking RMDs during that time, you are not required to take make-up withdrawals. However, you must start taking withdrawals now, and you must empty the account within ten years.
Talk To Your Financial Planner
You may wish to talk to your financial advisor about how the new rule affects you. He/she can help you determine how the rule will impact your heirs, and if and how you should alter your own withdrawals from your qualified plan. If you do not have a financial advisor, call us at (561) 625-1100 and we can provide you with a referral.
