December 2, 2024 / Newsletters, Publications
Final IRS Regulations Clarify SECURE Act Rules for Required Minimum Distributions from Inherited Retirement Plans
On July 18, 2024, the IRS issued final regulations (the Final Regulations) impacting the treatment of inherited retirement accounts and updating the required minimum distribution (RMD) rules for certain retirement plans, including individual retirement accounts (IRAs). These regulations implement changes put into law by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) and the SECURE 2.0 Act of 2022 (“SECURE 2.0”).
The significant changes made by these regulations are summarized below.
IRA Refresher
An IRA is an individual retirement account to which you can contribute your earned income, subject to certain limits. Contributions to a traditional IRA are generally tax-deductible, depending on your income level, but subsequent withdrawals will be subject to tax. In contrast, contributions to a Roth IRA are subject to tax, but subsequent withdrawals are generally tax-free. Early withdrawals (before age 59 ½) from either type of IRA will generally incur a 10% penalty.
With a traditional IRA, you are required to begin taking “required minimum distributions” (RMDs) from the account annually once you reach a specified age. The required beginning date for taking RMDs is April 1 of the year following the year in which you reach the specified age. The amount of the RMD will depend on your age and certain IRS-issued life expectancy factors. Roth IRAs are not subject to RMD requirements.
When the accountholder dies, any assets remaining in the IRA will pass according to the IRA beneficiary designation form and not under the terms of the accountholder’s trust or will. While accountholders typically designate individuals as beneficiaries, charities and trusts can also be named as beneficiaries. In some cases, designating a trust may provide certain advantages over designating an individual beneficiary, as discussed below.
Changes to RMD Ages
Under the Final Regulations, the applicable age at which an accountholder is required to begin taking RMDs (known as the required beginning date, or RBD) is as follows:
| Date of Birth | RBD Age |
| Before July 1, 1949 | 70 ½ |
| July 1, 1949 through December 31, 1950 | 72 |
| January 1, 1951 through December 31, 1959 | 73 |
| January 1, 1960 and later | 75 |
Required Distributions from Inherited Retirement Accounts
The Final Regulations also address the timing and amount of distributions for persons who inherit an IRA or other qualified retirement plan account.
Prior to the SECURE Act, a beneficiary who inherited a retirement account could often stretch the distribution of account funds over the beneficiary’s lifetime according to IRS-issued life expectancy factors. The SECURE Act changed this by requiring that the account be fully withdrawn within 10 years from the original accountholder’s death if the beneficiary is not an “Eligible Designated Beneficiary” (defined as (i) the deceased accountholder’s surviving spouse, (ii) the deceased accountholder’s minor child, (iii) a chronically ill or disabled person, or (iv) a person not more than 10 years younger than the deceased accountholder).
When the SECURE Act was passed into law, it was unclear whether a beneficiary subject to the 10-year rule could wait until the 10th year to take distributions or instead needed to take RMDs annually over the course of the 10-year period, with many practitioners adopting the former interpretation. However, in 2022, the IRS issued proposed regulations requiring RMDs to be taken each year during the 10-year withdrawal period, if the deceased accountholder had died on or after the accountholder’s RBD.
The final regulations issued in July confirm that a beneficiary who is not an Eligible Designated Beneficiary must take RMDs annually over the 10-year withdrawal period if the accountholder died on or after his or her RBD, based on the longer of the accountholder’s remaining life expectancy or the beneficiary’s remaining life expectancy, as determined by IRS-issued life-expectancy factors. However, if the accountholder died before his or her RBD (or in the case of a designated Roth account), the designated beneficiary does not need to take RMDs during the 10-year period, and instead may wait until the 10th year to withdraw the funds. The IRS has issued official notices assuring taxpayers that there will be no penalty assessed and no requirement to make up missed RMDs for 2021 to 2024 under the new rules. An Eligible Designated Beneficiary on the other hand, could receive RMDs annually over his or her life expectancy.
The following examples illustrate these rules:
- Example 1: Mary inherited a traditional IRA from her mother, who died in 2022, after her RBD. Mary is not a Eligible Designated Beneficiary. Mary must withdraw the entire account balance by December 31, 2032, and must take RMDs annually beginning in 2025, based on Mary’s life expectancy. Mary does not need to make up RMDs for 2023 or 2024 and will not be penalized for not taking them.
- Example 2: Assume the same facts as in Example 1, except that Mary’s mother died prior to her RBD. Mary still must withdraw the entire balance by December 31, 2032, but she is not required to take annual RMDs during that 10-year period.
- Example 3: Assume the same facts as in Example 1, except that Mary is a disabled individual and therefore is an Eligible Designated Beneficiary. Mary is not subject to the 10-year rule and may stretch the account balance for the remainder of her life, taking RMDs annually according to IRS-issued life-expectancy factors.