In this vlog, LKA Attorney Justin M. Kennedy discusses the impact of the final regulations issued on July 19, 2024, by the Department of the Treasury updating the required minimum distribution rules in response to the SECURE and SECURE 2.0 Acts.
New IRS Rules Clarify Required Distributions from Inherited Retirement Accounts
If you inherit an IRA or other retirement account, when and how you take distributions from that account can have significant tax consequences.
On July 19, 2024, the Department of the Treasury and the IRS issued final regulations addressing Required Minimum Distributions (RMDs) under the SECURE Act and SECURE 2.0 Act. Among other things, the regulations provide important clarification about the 10-year distribution rule that applies to many people who inherit retirement accounts.
Understanding the 10-Year Rule
The SECURE Act significantly changed the rules for inherited retirement accounts.
For deaths occurring after 2019, many beneficiaries who are not considered “eligible designated beneficiaries” are subject to what is commonly called the 10-year rule. Generally, this means the entire inherited retirement account must be distributed by the end of the tenth year following the year in which the original account owner died.
However, one of the questions following passage of the SECURE Act was whether beneficiaries could simply leave all of the money in the inherited account until the end of that 10-year period.
The answer depends, in part, on whether the original account owner died before or after they were required to begin taking RMDs.
Did the Account Owner Die Before Required Minimum Distributions Began?
If the original account owner died before their required beginning date and the beneficiary is subject to the 10-year rule, annual distributions generally are not required during years one through nine.
Instead, the beneficiary can generally determine when to take distributions during the 10-year period, provided the entire account is distributed by the end of the tenth year.
That does not necessarily mean waiting until year ten is the best strategy. Taking a large distribution in a single year could have significant income tax consequences. Beneficiaries should consider working with their tax and financial advisors to determine how distributions might best be spread over the 10-year period.
What If the Account Owner Had Already Begun Taking RMDs?
The rules are different when the original account owner dies on or after their required beginning date.
Under the final regulations, many beneficiaries subject to the 10-year rule must take annual RMDs during the 10-year period. The entire account must still be distributed by the end of the tenth year following the account owner’s death.
In other words, these beneficiaries generally cannot simply leave the entire inherited retirement account untouched for nine years and withdraw everything in year ten.
The amount of the annual RMD is determined under IRS life expectancy rules. Because the calculation depends on the circumstances of the account owner and beneficiary, beneficiaries should consult their financial or tax advisor rather than assuming that they can simply divide the account into ten equal annual distributions.
Special Relief Applies for 2024
There is another important consideration for beneficiaries dealing with these rules in 2024.
Before issuing the final regulations, the IRS provided relief for certain beneficiaries who did not take annual RMDs that would otherwise have been required under its interpretation of the SECURE Act’s 10-year rule.
That relief extends through 2024. The IRS has indicated that the final regulations regarding these RMD requirements will apply beginning with the 2025 calendar year.
This makes 2024 an important time for beneficiaries of inherited retirement accounts to understand which rules will apply to them going forward.
Some Beneficiaries Have Different Rules
Not everyone who inherits a retirement account is subject to the standard 10-year rule.
The SECURE Act created a category known as Eligible Designated Beneficiaries. This generally includes:
- A surviving spouse
- A minor child of the deceased account owner
- A disabled individual
- A chronically ill individual
- An individual who is not more than 10 years younger than the deceased account owner
Different distribution options may be available to these beneficiaries.
Surviving spouses, in particular, have special options that may not be available to other beneficiaries. Because choosing one option over another can have long-term tax consequences, a surviving spouse should carefully evaluate the available choices before taking action.
Beneficiary Designations Are an Important Part of Estate Planning
The new rules also serve as a good reminder that retirement account beneficiary designations are an important part of your overall estate plan.
Retirement accounts generally pass according to the beneficiary designation on file with the financial institution or plan administrator. Your beneficiary designations should therefore be coordinated with your Living Trust and the rest of your estate plan.
Who should be named as beneficiary depends on your individual circumstances. Your marital status, intended beneficiaries, tax considerations, the terms of your Living Trust, and the type of retirement account can all affect the appropriate strategy.
Beneficiary designations should also be reviewed periodically and following significant life events, such as a marriage, divorce, birth, death, or major change to your estate plan.
Inherited a Retirement Account? Get Advice Before Taking Action
If you inherit an IRA or other retirement account, avoid making assumptions about when distributions must begin or how quickly the account must be depleted.
The rules can differ depending upon:
- When the original account owner died
- Whether the owner had reached their required beginning date
- Your relationship to the deceased account owner
- Whether you qualify as an Eligible Designated Beneficiary
- The type of retirement account involved
- The beneficiary designation on the account
There may also be important tax and legal decisions that need to be made within specific time periods following someone’s death.
If a loved one has passed away, we recommend consulting with an experienced estate planning attorney, along with your tax and financial advisors, to understand the options available to you.
At Litherland, Kennedy & Associates, we help California families navigate the legal issues that arise following the death of a loved one and understand how their estate planning and beneficiary designations work together.
If you have questions about your estate plan or what to do following the death of a loved one, please contact our office at (408) 356-9200.
Originally published August 2, 2024. This article reflects federal law and IRS guidance available as of that date, including final Required Minimum Distribution regulations issued in July 2024. Those final regulations generally apply to Required Minimum Distributions for calendar years beginning on or after January 1, 2025. Tax and retirement account laws are complex and subject to change. This article is provided for educational purposes only and is not intended as legal or tax advice. Please consult with qualified legal, tax, and financial professionals regarding your individual circumstances.
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