Updated RMD Rules for Inherited IRAs

Last week, the IRS updated the RMD (Required Minimum Distribution) rules related to inherited IRAs. This update was significant because individuals, advisors, and the IRS have been debating the interpretation of the “10-year rule” language. If you inherited an IRA from someone other than a spouse after December 2019, the question was, were you required to take an annual RMD in the 10-year period, or did the account just have to be emptied by the 10th year?

To paint a clear picture of where this update is relevant, it is important to understand the types of beneficiaries defined by the IRS and their distribution rules. There are three categories of beneficiaries; “Designated Beneficiary,” “Eligible Designated Beneficiary,” and “Beneficiary.”

#1 “Designated Beneficiary”

A Designated Beneficiary is a person or specific type of trust. Being a Designated Beneficiary means that you will always qualify for the 10-year rule.

10-year Distribution rule

If inherited before the decedent’s RBD (Required Beginning Date): The account must be emptied by December 31^st of the 10^th anniversary of death. Essentially, there is no RMD until the 10^th This allows designated beneficiaries to plan accordingly based on income needs and their current tax situation.
If inherited after the decedent’s RBD: In February of 2022, the IRS issued proposed rules that stated that this group of people WOULD be required to take annual RMDs throughout the 10-year period. Because this was only a proposed rule and not a final rule, the IRS waived penalties for those who did not take RMDs in 2021, 2022, 2023, and 2024. Finally, this past week, the IRS confirmed that Designated Beneficiaries will be required to take annual RMDs starting in 2025 if the decedent dies on or after their RBD. They also confirmed that the previous years (2021-2024), where the penalties were waived, count towards the beneficiaries’ 10-year period, even though you are not required to take distributions until 2025.

#2 “Eligible Designated Beneficiary”

Surviving spouses
- A surviving spouse will always have the option to move the entire balance of the decedent’s IRA into their own IRA. The spouse’s IRA will then have IRA rules based on their age.
- They can also elect to step into the shoes of the deceased spouse.
People no more than ten years younger than the decedent, disabled people, or chronically ill people
- If the decedent has not reached the RBD, the RMD is calculated based on the beneficiary’s life expectancy.
- If the owner was already taking RMDs, the future distributions are based on the greater of the beneficiary or owner’s life expectancy
Minor Children of the decedent
- Minor children are only allowed to use their life expectancy until they reach the state age of majority, at which point they must abide by the 10-year rule.

#3 “Beneficiary”

This gives your heirs the least amount of flexibility. The most common beneficiaries in this category are estates and charities. The distribution rules are based on whether the original IRA owner died before or after their RBD. If the original IRA owner died after their RBD, RMDs are based on the original owner’s single life expectancy. If the owner died prior to their RBD, the 5-year rule applies, requiring all assets to be distributed by the end of the fifth year following the owner’s death.

Conclusion

Understanding RMD rules regarding inherited retirement accounts is important to ensure you avoid penalties. It is equally important to ensure beneficiaries are listed on these accounts so your heirs can have preferential tax treatment at your death and avoid the “Beneficiary” category.

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