What You Should Know About the Required Minimum Distribution (RMD) Rules for Inherited IRAs

The SECURE Act became law on December 20, 2019, and it modified several rules related to tax-advantaged retirement accounts. Among the changes that had an immediate impact was the new guidelines regarding required minimum distributions (RMDs) from inherited IRAs. However, those guidelines were unclear and led to confusion. As a result, the IRS has taken steps to issue guidance, and here is what you should know about the new RMD rule.

What are RMDs?

Required Minimum Distributions (RMDs) are minimum amounts that the IRS mandates a retirement plan account owner must withdraw annually starting with the year they reach 72 (70 ½ if they reach 70 ½ before January 1, 2020). For individuals turning 73 in 2023 through 2032, your adjusted RMD age is now 73. For anyone turning 73 in 2033 or beyond, the RMD-adjusted age has been pushed back to 75.

Failure to withdraw the required amount can lead to a penalty tax of 25% of the amount that should have been withdrawn. If the missed distribution is remedied during the specified correction window, the penalty is reduced to only 10%. These RMD rules still apply if you inherit an IRA, though there are nuances to be aware of based on your relationship to the deceased original owner.

Types of beneficiaries

Any person or entity the owner chooses to receive the benefits of the IRA after they die is considered a beneficiary. The rules for determining required minimum distributions for beneficiaries depend on whether:

• The beneficiary is the surviving spouse.
• The beneficiary is an “Eligible Designated Beneficiary” other than the surviving spouse (the owner’s minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than ten years younger than the IRA owner).
• The beneficiary is an individual (other than an eligible designated beneficiary).
• The beneficiary isn’t an individual (for example, the beneficiary is the owner’s estate).

The RMD rule for beneficiaries

The following distribution rules apply if the beneficiary is:

• A spouse
  • Treat the IRA as their own by designating themselves as the account owner or rolling it over into an existing qualified account in their name, and regular RMD rules would apply.
  • Treat themselves as the beneficiary and move the money into an inherited IRA, and begin taking RMDs either based on age and life expectancy (the IRS provides a table for this[i]), based on the “10-year rule” (for more on that, see below) or all at once in a lump sum.
  • Effective in 2024, surviving spouse beneficiaries can identify as the decedent for RMD purposes. By doing so, RMDs can be delayed until the deceased spouse has reached the RMD age.
• An “Eligible Designated Beneficiary”
  • Move the money into an inherited IRA and begin taking RMDs either based on your age and life expectancy, based on the “10-year rule”, or all at once in a lump sum.
  • Minor children must take the remaining distributions within 10 years of age 18.
• An individual who does not meet the requirements to be considered an “Eligible Designated Beneficiary”
  • Distribute all assets based on the “10-year rule.”[ii]
• An entity, charity, or non-qualifying trust
  • If the original account owner was alive by April 1 of the year they reached age 72, the distributions would be based on the owner’s remaining Single Life Expectancy.
  • Otherwise, the assets must be distributed entirely by December 31 of the 5th year, the anniversary of the IRA owner’s death.

The 10-year rule

The 10-year rule requires the IRA beneficiaries not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death.   In February 2022, the IRS proposed regulations under IRC Sec. 401(a)(9), which would require non-eligible designated beneficiaries to take an annual RMD over the beneficiaries’ remaining life expectancy for years 1-9 and final distribution to withdraw the IRA by the end of year 10 entirely. These are referred to as Specified RMDs.

Note: On October 7, 2022, the IRS issued Notice 2022-53, which provided guidance that the final regulations, if issued under the rule above, will apply no earlier than 2023. To the extent taxpayers of inherited IRAs did not take a specified RMD for 2021 or 2022, it will not violate the RMD rules, and excise taxes will not be incurred.

With this new IRS guidance, working with a team of professional advisors has become even more important for following the law and strategically planning for current and future taxes.

Contact us to learn how our Personal CFO and Tax Advisory teams can help you create a plan.

[i] Income Tax Regulations (26 CFR part 1) under section 401(a)(9) of the Internal Revenue Code (Code), §1.401(a)(9)-9 Life expectancy and distribution period tables, (b) Single Life Table.

[ii] If the account owner died on or before December 31, 2019, they have the ability to take RMDs based on age using the IRS Single Life Expectancy Table, or if the original account owner died on or after January 1, 2020, must distribute account within 10 years following the death of the original owner.