A tax law change in 2019 essentially ended “stretch IRAs” by requiring most beneficiaries of inherited IRAs (other than a spouse) to withdraw all of the funds within 10 years. Since then, there’s been confusion surrounding inherited IRAs and the so called “10-year rule” for required minimum distributions (RMDs).

That is, until now. The IRS has issued final regulations relevant to taxpayers who are subject to the “10-year rule” for RMDs from inherited IRAs or defined contribution plans, such as 401(k) plans. In a nutshell, the final regs largely adopt proposed regs issued in 2022.

2022 proposed regs sowed confusion

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in 2019, most heirs other than surviving spouses must withdraw the entire balance of an inherited IRA or defined contribution plan within 10 years of the original account owner’s death. In February 2022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. Under the proposed regs, if the account owner dies on or after the required beginning date (RBD), designated beneficiaries must take their taxable RMDs in Year 1 through Year 9 after that death (based on their life expectancies), receiving the balance in the 10th year.

In other words, beneficiaries aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and, depending on their situations, could push them into higher tax brackets during those years.

The IRS soon began to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. The reason? Beneficiaries could have been assessed a tax penalty on the amounts that should have been distributed but weren’t. And the plans could have been disqualified for failure to make RMDs.

In response, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. The tax agency also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.

The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.

In April 2024, the IRS again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the owner passed away between 2020 and 2023, on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs for these years, and plans won’t be disqualified based solely on such missed RMDs.

2024 final regs provide clarification

The final regs require certain beneficiaries to take annual RMDs in the 10 years following the account owner’s death. The regs take effect in 2025. If the deceased hadn’t begun taking his or her RMDs though, the 10-year rule is somewhat different. While the account has to be fully emptied under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

Here’s an example: Ken inherited an IRA in 2021 from his father, who had begun to take RMDs. Under the IRS-issued waivers, Ken needn’t take RMDs for 2022 through 2024. However, under the final regs, he must take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031.

Had Ken’s father not started taking RMDs, Ken would have had the flexibility to not take distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, Ken would be in compliance with the rules.

Contact us with questions

If you’ve inherited an IRA or defined contribution plan in 2020 or later, it’s understandable if you have questions about the RMD rules. Please don’t hesitate to reach out. We’d be please to explain the IRS’s regulations and suggest strategies that might save you taxes and avoid penalties. You can also visit our related service page.

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