Inherited IRA Required Minimum Distributions (RMDs) Post-SECURE Act

Purpose

The Wealthspire Advisors Financial Planning Committee has recently received several questions regarding RMD rules in a post-SECURE Act world. Questions remain about the RMD rules for non-spousal beneficiaries subject to annual RMDs during the 10-year distribution period because those regulations have not yet been finalized.

The purpose of this piece is to outline what our team believes to be best practices regarding these unfinalized regulations. This memo will also provide a quick review and best practices for the existing RMD rules.

Background on Settled Regulations

The SECURE Act, officially enacted on January 1, 2020, brought meaningful changes to the lifetime “stretch IRA.” Previously, both spousal and non-spousal beneficiaries of a qualified plan or IRA[1] inherited before January 1, 2020 were able to stretch required minimum distributions (RMDs) over their own life expectancy.[2] This allowed withdrawals to be spread out over the beneficiary’s lifetime and planned around his or her marginal income tax rate each year. The stretch provision also applied to the beneficiaries of inherited IRAs owned by trusts, assuming those trusts were properly structured.

The SECURE Act eliminated the stretch for most non-spousal beneficiaries of inherited IRAs received after January 1, 2020, resulting in three distinct IRA beneficiary categories with differing distribution rules for each. The beneficiary categories are noted below:

• Eligible designated beneficiaries (EDBs)
  • Surviving spouse
  • Disabled or chronically ill individual
  • An individual who is not more than 10 years younger than the IRA owner
  • Minor children
  • Certain trusts
• Non-eligible designated beneficiaries (non-EDBs)
  • Any individual that doesn’t meet the requirements for an eligible designated beneficiary (e.g., an adult child)
  • Certain trusts
• Non-designated beneficiaries
  • Charities
  • Estates
  • Certain trusts

The distribution rules for each beneficiary category are further detailed in this blog post and are summarized below:

• EDBs generally receive an exception to the elimination of the stretch and can continue to distribute RMDs over the beneficiary’s life expectancy.[3]
  • Stretch treatment for an inherited IRA owned by a trust only applies to conduit “see through” trusts for benefit of an EDB beneficiary.
  • Planning note: Careful review is warranted where a trust (including a revocable trust) is named as primary or contingent beneficiary on a qualified plan/IRA. Accumulation trusts can invalidate stretch treatment for EDBs, whereas conduit trusts provide the opportunity to conserve the stretch. This can be particularly important for second marriages where a QTIP Marital Trust will be used.
• Non-EDBs must empty their accounts within 10 years after the year when the original IRA owner died. Further, as clarified by the IRS in final regulations issued in July 2024, if the decedent died after his/her required beginning date (RBD), non-EDB beneficiaries must also take annual RMDs starting in 2025.
  • Planning note: Since all non-EDBs must fully distribute the balance within 10 years, a trust beneficiary may no longer serve its intended purpose. If creditor protection is important, an accumulation trust could remain preferrable, since annual RMDs need not be distributed to the beneficiary (or at the end of 10 years) and can remain in the trust. However, the trade-off to creditor protection is a higher tax bill since trust income tax brackets are very compressed. A simpler solution, if creditor protection is not important, could be naming individual non-EDBs as beneficiaries outright.
  • Planning note: See “Best practices for Final Regulations” below for non-EDBs who are required to take RMDs during the 10-year period.
• Non-designated beneficiaries have five years to distribute the account balance if the decedent was not subject to RMDs or must continue RMDs over the decedent’s single life expectancy if they had already begun.

Best Practices for Final Regulations

In February 2022, the IRS issued proposed regulations that surprised many planners and experts. The regulations would require some non-EDBs of inherited IRAs to take an RMD each year of the 10-year period, with the balance of the account distributed in the 10th year following the original IRA owner’s death. The annual RMDs would be based upon the non-EDBs single life expectancy. The proposed regulations apply only if the decedent was already taking RMDs and do not apply to inherited Roth IRAs; if the decedent had not started RMDs or owned a Roth IRA, the non-EDB is only required to withdraw the balance by the end of the 10-year period.

In other words, the proposed regulations only apply to (1) non-EDBs of post-RMD inherited traditional IRAs for deaths that occurred on or after Jan 1, 2020, and (2) when the decedent died after his/her RBD. This will most commonly be seen with adult children inheriting an elder parent’s retirement account.

The IRS released successive notices (Notice 2022-53 and Notice 2023-54) announcing that (1) final regulations for RMDs of inherited IRAs will not be effective until at least 2024, (2) excise tax will not be assessed for “missed” 2021, 2022, and 2023 RMDs, and (3) excise tax refunds are available for taxpayers who previously paid tax for a missed RMD during those years.

In April 2024, the IRS released Notice 2024-35, announcing that (1) excise tax will also not be assessed for “missed” RMDs in 2024, but (2) that final regulations are anticipated to apply for calendar years beginning on or after January 1, 2025.

As expected, in July 2024, the IRS released final regulations to clarify annual RMDs are required during the 10-year rule if the decedent died on/after the RBD. This rule will not begin to apply until 2025. However, while the final regulations do not apply until 2025, prior years will still count as part of the 10-year period.

Here is an example. Consider a “10-year rule” non-EDB who inherited an IRA in 2021 from a 78-year-old decedent:[4]

• 2022-2024: No RMDs
• 2025-2030: Annual RMDs
• 2031: Account must be emptied

Please remember:

• Owner death before RBD = empty IRA within 10 years
• Owner death on/after RBD = annual RMDs based on non-EDB single life expectancy table years 1-9 and distribute entire account within 10 years.

We recommend that advisors still consider individual client circumstances and whether taking an inherited IRA distribution in 2024 is advisable, even if not required:

• Planning note: If a client is expected to be in a lower marginal tax bracket in 2024 or otherwise needs the funds, then distributing inherited IRA funds could be advisable.
• Planning note: For an inherited Roth IRA, continuing to wait the full 10-year period to distribute the account is recommended if the beneficiary does not otherwise need the funds. Annual RMDs are not required, and the lump sum distribution will not be taxable.

If you have any questions, please contact any member of the FPC at WS-Dept-FinancialPlanning@wealthspire.com.

[1] The SECURE Act changes to the stretch impact non-spousal beneficiaries of IRAs and qualified plans including 401(k), 403(b), and 457(b) plans. Hereafter, this memo refers only to “inherited IRAs” for simplicity.

[2] Spousal beneficiaries of a qualified plan/IRA have multiple options, including treating the decedent’s IRA as their own.

[3] Minor children must distribute the inherited IRA in 10 years upon reaching the age of majority.

[4] Source: Jeff Levine