In a long-awaited move, the IRS has finally issued its final rules on the controversial 10-year rule for inherited Individual Retirement Accounts (IRAs), set to take effect in 2025. This new guidance resolves a question that has puzzled advisors and beneficiaries alike since the original SECURE Act was passed five years ago.
Key Takeaway on the New Rules The central issue was whether non-spouse beneficiaries must take annual Required Minimum Distributions (RMDs) during the 10 years following the original account holder's death or if they could wait and withdraw the entire amount at the end of the decade. The IRS has now confirmed that most beneficiaries will need to take annual RMDs, ensuring the account is fully depleted by the end of the tenth year—especially if the original account holder had already begun taking RMDs before their passing.
Important Exceptions The IRS's final rules provide critical clarity on exceptions and specific circumstances:
- Flexibility in Timing: If the original account holder passed away before their RMD age, beneficiaries have more flexibility in timing their withdrawals within the 10-year window. However, the account still must be emptied within 10 years.
- Exempt Beneficiaries: Certain "eligible designated beneficiaries" are exempt from the 10-year rule:
- Surviving spouses
- Minor children (under age 21)
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased
Additionally, it's important to note that the inherited IRA rules implementing changes made by the SECURE Act require designated beneficiaries to continue taking RMDs each year during their 10-year distribution period, ensuring that the entire account balance is distributed by the end of the 10 years. This requirement is particularly relevant when:
- The deceased account owner had reached their required beginning date for taking RMDs at the time of their death, and
- The account beneficiaries do not fall into one of the five eligible designated beneficiary categories mentioned above.
Penalty Relief and the Road Ahead
While these regulations are finalized, they won’t take effect until 2025. To ease the transition, the IRS has provided a grace period for beneficiaries subject to the new rules, stating that no RMDs need to be taken for 2021 through 2024. However, it's crucial to remember that the 10-year clock does not start in 2025 when these new rules go into effect but is still based on the date of death of the original account holder.
Planning Ahead The era of stretching IRA withdrawals over a lifetime is ending for many beneficiaries. As 2025 approaches, planning how to manage inherited IRA funds over a shorter timeframe is crucial, considering both tax implications and personal financial goals. Whether you’re a current retirement account holder or a potential beneficiary, staying informed is essential. The complexity of these new rules highlights the importance of consulting with a trusted financial advisor or tax professional. At Reynolds + Rowella, our team is ready to help you navigate these changes and optimize your financial strategy. Reach out today to ensure your estate and tax plans are aligned with the latest regulations.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
