The IRS recently published new regulations for taxpayers subject to the "10-year rule" for required minimum distributions (RMDs) from inherited IRAs or defined contribution plans. Effective in 2025, these final regulations require many beneficiaries to take annual RMDs over the ten years following the deceased's death.

SECURE Act Ends Stretch IRAs

The origins of the new regulations go back to the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act. This law eliminated the "stretch IRA," which previously allowed all beneficiaries of inherited IRAs to stretch RMDs over their lifetimes, deferring taxes and allowing the accounts to grow.

Under the SECURE Act, only certain eligible designated beneficiaries (EDBs) may stretch out payments over their life expectancies. These beneficiaries include:

• Surviving spouses,
• Children under the age of majority,
• Disabled individuals,
• Chronically ill individuals and
• Individuals no more than ten years younger than the account owner.

All other heirs, known as designated beneficiaries, must withdraw the account balance within ten years of the account owner's death, regardless of whether the deceased started RMDs.

Note: The age at which account owners must begin taking RMDs increased from 72 to 73 in 2023. It will rise to 75 in 2033.

Proposed Regulations Created Confusion

In February 2022, the IRS issued proposed regulations that caused confusion. They required designated beneficiaries to take taxable RMDs each year for nine years if the deceased died after starting RMDs, with the balance due by the end of year 10. This change caught many heirs off guard, leaving them unsure when they were required to start taking RMDs. Failure to comply could have resulted in significant penalties, which the IRS later waived until 2024.

Final Regulations Offer Clarity

The final regulations provide a clearer roadmap. If the deceased had begun taking RMDs, the beneficiary must continue taking annual distributions for ten years. However, if the deceased has not yet begun taking RMDs, the beneficiary has more flexibility—no annual distributions are required, but the account must be fully distributed by the end of the ten years.

For example, if a beneficiary inherited an IRA in 2021 from someone who had begun RMDs, they wouldn't need to take distributions in 2022 through 2024 due to the waivers. However, they must take RMDs for 2025 through 2030, with the account fully liquidated by 2031.

Additional Proposed Regulations

The IRS has also released new proposed regulations, set to take effect in 2025, which cover other RMD-related changes made by SECURE 2.0. These include:

• The RMD age for individuals born in 1959,
• Rules on purchasing annuities with part of a defined contribution plan account,
• Distributions from Roth accounts,
• Corrective distributions, and more.

Timing is Key

Even if RMDs aren't yet required from an inherited IRA, beneficiaries should still consider taking distributions for tax planning. If you've inherited an IRA or a defined contribution plan and are unsure of your RMD obligations, contact Brinker Simpson. We can help you navigate the rules and determine the best course of action for your financial situation.