The SECURE Act of 2019 brought big changes to the retirement world, including the taxation of inherited retirement accounts. So-called “stretch” rules that allow a longer window for required account distributions are no longer available for certain beneficiaries and are instead replaced by a requirement to distribute assets within ten years. The 10-year rule applies to beneficiaries inheriting a retirement account in 2020 or later, other than:

• An account owner’s surviving spouse.
• Chronically ill or disabled non-spouse beneficiaries.
• Non-spouse beneficiaries not more than ten years younger than the deceased account owner.
• A minor child of the account owner under age 21.

As part of this new 10-year rule, questions arose regarding the timing of distributions for impacted inherited retirement accounts – are annual required minimum distributions (RMDs) needed, or can funds be distributed all in year ten?

Proposed regulations explained that in the event an account owner dies after RMDs have already begun, annual distributions to beneficiaries who have inherited the account must continue. This caused confusion for many who interpreted the law to simply require full account distribution within ten years of the owner’s death.

To help implementation issues, the IRS provided excise tax relief for tax years 2021 through 2024 for those who did not make annual RMDs on inherited retirement accounts that were subject to the new 10-year rule. Though there was no waiver on the RMD requirement itself for those years, penalty relief effectively deferred the annual RMD requirement until final regulations could be issued. However, the 10-year time frame to fully distribute account funds was not extended.

Final regulations recently issued left the new RMD rule unchanged and take effect in 2025. Therefore, annual distributions are required at least as rapidly as made while the account owner was living, with complete distribution no later than ten years following the account owner’s death. These rules apply to inherited traditional and Roth retirement accounts.

Please contact your RubinBrown representative with questions or concerns.

Published: 07/29/2024

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