Over the past few years, the SECURE and SECURE 2.0 Acts dramatically changed the rules for qualifying inherited retirement plans, including IRAs. The IRS finally released guidance clarifying some of the major sticking points for fund owners and their beneficiaries.
In the past, non-spouse beneficiaries inheriting qualifying retirement plans could stretch their distributions over their lifetimes. This includes inherited 401(k)s, 403(b)s, and Roth IRAs. The SECURE and SECURE 2.0 Acts changed that. What we are left with is a 10-year rule, requiring distribution within a decade of the retirement fund being passed down. But questions arose. Mainly, are annual distributions required during that time, or can non-spouse beneficiaries skip years or even wait until the end of the 10 years to take the payout? And, does it matter if the original account holder had already started Required Minimum Distributions (RMDs)? (Eventually the age for RMDs will move to 75. It currently stands at 73.)
Proposed regulations were issued in 2022, and after making some changes based on responses, the IRS recently issued final regulations to provide answers.
In essence, “the IRS confirmed that most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the tenth year,” states Kiplinger’s Kelley R. Taylor. But, she adds, “This applies specifically to cases where the original account holder had already started taking RMDs before they passed away.”
Accelerating distributions on these types of accounts may seem like a victory, but it’s important to keep in mind that, unless they are from a Roth IRA, these distributions are generally taxed as income. If the distributions are large enough, they could even bump you up into a higher income bracket.
If the original account holder passes before RMDs take effect, there is more leeway for withdrawals, but the 10-year mark still stands. The only beneficiaries exempt from the 10-year rule are surviving spouses, minor children (under age 21), disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased (a younger sibling, for instance).
These finalized regulations will apply starting in 2025. But even if you inherited a qualifying plan before that date or are a survivor who falls into one of the exempt categories named above, you may be blindsided at tax time. With every regulation change comes a potential alteration to how carefully saved money will be taxed when it’s passed down. Feel free to contact us with questions.
