The rules around Required Minimum Distributions (RMDs) from retirement accounts have seen significant changes over the past few years. Initially, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 altered the landscape by changing the starting age for RMDs from 70½ to 72. Then in 2020, the SECURE Act 2.0 further modified these regulations by increasing the RMD age to 73 starting in 2023 and to 75 starting in 2033.
The SECURE Acts also impacted inherited retirement account RMDs. Prior to their implementation, beneficiaries could “stretch” out distributions to enjoy tax-deferred growth, potentially over decades. The SECURE Act put an end to this and requires most beneficiaries of an inherited IRA to empty the account within 10 years of the original account owner’s death.
However, there was a lot of ambiguity within the rules, so last month, the IRS issued a new ruling that cleared up some of the confusion.
Key Points of the New IRS Ruling
- RMD Initiation for Heirs: The new IRS guidance clarifies that beneficiaries of inherited IRAs must begin taking RMDs starting the year after the original account holder’s death. This applies to accounts inherited from those who passed away after December 31, 2019.
- 10-Year Distribution Rule: Beneficiaries must deplete the inherited IRA within 10 years if the original owner passed away after the effective date of the SECURE Act. This rule aims to limit the timeframe for tax-deferred growth in inherited accounts.
- Eligible Designated Beneficiaries: Surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased can still stretch distributions over their lifetimes.
- Non-Eligible Beneficiaries: Those who do not fall into the categories of eligible designated beneficiaries above must follow the 10-year distribution rule.
- Annual Distributions May Be Required: While it might sound like a good idea to let the account grow and take a full distribution of the funds at the 10-year mark, this is not always an option. If the original account owner had started taking RMDs before they died, the beneficiary usually has to continue taking annual distributions as well.
Considerations Based on the Rule
- Review Beneficiary Designations: Ensure that your beneficiary designations on retirement accounts are up-to-date and align with your estate planning goals.
- Consider Roth Conversions: Converting traditional IRAs to Roth IRAs can be a smart strategic move. Roth IRAs do not require RMDs during the owner’s lifetime, and withdrawals are tax-free for beneficiaries.
- Plan for Tax Implications: Reach out to us so we can evaluate any potential tax implications of RMDs and inherited IRAs. This can help minimize the tax burden for you and your heirs.
- Utilize Trusts: Consider using trusts to manage how beneficiaries take RMDs since they can offer more control over the distribution of assets.
Believe it or not, the new RMD rules do bring some clarity but also require careful planning to ensure compliance. With so many “if this, then that” caveats, it is vital to carefully weigh how and when to take RMDs in light of your larger financial picture and retirement planning. Contact us for answers to your questions and personalized advice tailored to your specific situation.