Final Regulations for Inherited IRAs (Part 1)

The SECURE Act 2.0 of 2022 enacted many changes to the rules surrounding inheriting retirement plans. One significant change is to the required minimum distribution (RMD) rules for beneficiaries who inherit Individual retirement accounts (IRAs) on or after January 1, 2020. This two-part series discusses the finalized inherited IRA rules, which go into effect in 2025.

The rules for distributions can be particularly complex, so we are breaking this post into two parts. Part 1 speaks to RMD rules for Non-Eligible Designated Beneficiaries and Non-Designated Beneficiaries (defined below). Part 2 addresses RMD rules for Eligible Designated Beneficiaries.

What is a Required Minimum Distribution?

As the name suggests, RMDs are minimum amounts that you are required to annually distribute from your tax deferred retirement accounts (401(k), 403(b), IRA, SIMPLE IRA, etc.) beginning the year in which you turn 73 (75 for people born after 12/31/1959).

If you are a beneficiary who inherits a retirement account, you are also subject to RMDs, regardless of your age. There are different rules depending on your relation to the deceased, so it is important to know how the IRS classifies this relation.

The Three Beneficiary Classifications

1. Eligible Designated Beneficiary (See Part 2)
   • Spouse of the deceased
   • Minor child of the deceased (younger than 21)
   • Chronically ill or disabled person
   • Person not more than 10 years younger
2. Non-Eligible Designated Beneficiaries
   • Any person who does not meet the qualifications of (1) above
3. Non-Designated Beneficiaries
   • Any non-person such as certain trusts, charitable organizations, or situations when no beneficiary is named

When do I have to start taking Required Minimum Distributions?

If the original account owner was not yet taking required minimum distributions, and:

You are a Non-Eligible beneficiary, you must fully distribute the inherited retirement account by the end of the 10th year following the year of the original account owner’s death (i.e. if the owner passes in 2025, the beneficiary would have until 12/31/2035 to fully distribute the account). The distributions can be done in varying amounts at any point within the time window.

If you are a Non-Designated beneficiary, you must fully distribute the inherited retirement account by the end of the 5th year follow the year of the original account owner’s death.

If the original account owner was already taking required minimum distributions, and:

You are a Non-Eligible beneficiary, then you are still bound to the 10-year rule mentioned above. In addition to depleting the account in the specific timeframe, they must also take annual RMDs from the inherited account. The annual requirements in years 1 – 10 alone are not likely to satisfy the full distribution within the 10-year period, so supplemental distributions are necessary to fully deplete the inherited account.

If you are a Non-Designated beneficiary, you can stretch distributions over the original account owner’s life expectancy with annual distributions.

Failing to take an RMD can incur penalties of up to 25% on top of the related income taxes, so it’s worth handling with diligence.

How do I calculate a Required Minimum Distribution?

1. Identify the balance of relevant IRA account(s) as of December 31st of the prior year.
2. Determine the Life Expectancy Factor using the appropriate IRS Lifetime Table.
   • The age and IRS Life Table to utilize change based on the type of beneficiary.
3. Divide the result of step 1 by the result of step 2

This figure will change annually as the results of step 1 and 2 change. It is also applicable only in years where RMDs are required (recall that in some cases for the 5- and 10-year rules, RMDs are not required).

Consider coordinating with a financial advisor and a tax professional to coordinate a strategy that best fits your financial circumstance.