New Required Minimum Distribution (RMD) Rules | What You Need To Know
Prior to the SECURE Act, beneficiaries could take Required Minimum Distributions (RMDs) based on their own life expectancy (using a uniform lifetime table).
Simple.
After the SECURE Act, RMDs are taken based on whether you’re a designated beneficiary or a non-designated beneficiary. Designated beneficiaries get split up into eligible designated beneficiaries and non-eligible designated beneficiaries, of which, both classifications have eligibility criteria & different rules for whether the decedent died before or after the required beginning date.
Complex.
When the SECURE Act was passed, this left many questioning how the IRS would interpret this tax law.
Do beneficiaries now subject to the 10-year rule have to take RMDs out in even distributions annually? Or do they just need to fully distribute the account by the end of year 10?
Is there a timeline for when surviving spouses can treat an inherited account as their own?
Further, would that mean that an eligible designated beneficiary, such as a spouse, could elect the 10-year rule first, then at year 9 (after taking no RMDs for the first 9 years) elect to make a spousal rollover and treat distributions based on her life expectancy?
& many other questions like this.
But since the IRS proposed their final regulations (a final draft from their initial regulations in February 2022) we now have definitive insight into how the IRS is interpreting the SECURE Act.
Some good news here is that the IRS waived the annual RMD requirement for affected beneficiaries from 2021-2024 who were unaware of what to do. But starting in 2025, annual RMDs are effective - so make sure you know what applies to you if you've inherited assets between this time frame (noting the 10-year clock would start after death & not in 2025).
Jeffrey Levine over at Kitces.com created a flowchart to help out with these new rules, pictured below:
These rules do present some unique provisions to be aware of:
If you have an IRA owner with multiple IRAs and different beneficiaries the remaining year date of death RMD must be taken proportionally from each IRA based on prior-year ending values.
Meaning the IRA RMD is rolled up then & if you have one IRA where 100% of IRA #1 goes to John & 100% of IRA #2 goes to Sally, then upon passing the RMD will be taken pro-rata from each IRA to go to the respective beneficiary.
Also, what used to be a 50% penalty for missing a RMD is now a 25% penalty for missing an RMD that has the potential to be automatically abated by taking the RMD by 12/31 of the year after death.
For eligible designated beneficiaries who inherit before the required beginning date, they can switch from the Stretch rules or the 10-year rule - but, the caveat here is that if your qualified dollars are in a employer provided plan, the plan document could dictate what you are required to do with those dollars, thereby, eliminating your choice.
To me, this emphasizes the importance of taking control over your assets if you’re no longer with your employer by rolling them into an IRA, or, at the very least, having a good understanding of your employer plan document rules.
Final regulations also noted that there is no timeline for when a spouse would need to claim the inherited assets as their own.
For a spouse eligible designated beneficiaries, if they decide to elect the 10-year rule in an employer sponsored plan & not take RMDs for the first 9 years, then make a spousal rollover at the end of year 9 - the IRS has enacted what’s called hypothetical RMDs.
Meaning, a spouse could do this. BUT, if they do, they will have to take the prior 9 years worth of RMDs first.
Reason for this is to discourage someone from abusing the advantages of tax-deferral.
Further, with spousal elections, for spouses whose RMD would begin in 2024 or later & the decedent died prior to their required begin date, the spouse can wait to take RMDs until the decedent would have reached their RMD age, THEN take RMDs based on the uniform lifetime table of the spouses age (pretty cool).
The definition of a minor child for eligible designated beneficiary purposes is age 21.
On a personal note - this is good news. I had a client pass who had a conduit trust, who had minor children as the beneficiaries. In Delaware age of majority is 18, so when IRS final regs noted age 21, this allows for the IRA assets to stretch another 3 years (& yes, it’s generally disadvantageous to have a trust be the beneficiary of qualified assets due to higher trust & estate tax rates - but this was a unique circumstance).
Prior rules stated that each IRA had its own RMD. Once an RMD was satisfied for that account, you could make Roth conversions. This was nice because for tax planning purposes, it’s best to take RMDs later in the year so you can gain an extra year of gain deferral. But it’s best to make Roth conversions early in the year so you have the whole year of tax-free growth - this creates a catch 22.
You could get around this by opening two IRAs, then satisfying the RMD of the smaller account, thereby making the next dollars eligible for Roth conversions, even though in another account, you still have a larger RMD, but that is to be taken later in the year.
Now, the SECURE Act states that all distributions from any IRA are considered an RMD until the total amount of IRA RMDs have been distributed.
The result?
A loss of a nice tax planning strategy.
There are other nuances across RMD rules, but this wraps up the majority of the changes.
In light of these new RMD rules, staying informed and planning strategically are essential to ensuring your retirement accounts are managed efficiently and in compliance with the latest regulations.