New IRS Regulations for Inherited IRAs

2019 SECURE Act and the End of Stretch IRAs

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in 2019, brought major changes to the way inherited IRAs are managed. One of the most notable changes was the elimination of the “stretch IRA,” which allowed beneficiaries to stretch RMDs over their life expectancies. This provided younger heirs the opportunity to take smaller distributions over many years, deferring taxes as the accounts grew. The SECURE Act now imposes stricter rules to accelerate tax collection:

Eligible Designated Beneficiaries (EDBs)

Surviving spouses, children under the age of majority, individuals with disabilities, chronically ill individuals, and those not more than 10 years younger than the account owner are allowed to stretch payments over their life expectancies.

Designated Beneficiaries

All other heirs must withdraw the entire balance within 10 years of the original owner’s death, regardless of whether RMDs had begun.

Confusion from Proposed Regulations

In February 2022, the IRS issued proposed regulations addressing the 10-year rule, causing confusion among many taxpayers who inherited IRAs or defined contribution plans. Unclear guidance led to penalties for well-intentioned distributions and plan disqualifications for failing to make RMDs. Consequently, the IRS issued waivers on enforcing the 10-year rule, which will expire after 2024 with the release of the final regulations.

Clarity from Final Regulations

The IRS reviewed comments on the proposed regulations and provided clearer guidance in the final regulations. If the deceased had begun taking RMDs before death, designated beneficiaries must continue annual distributions, ensuring the account is fully distributed within 10 years. If the deceased had not begun RMDs, beneficiaries must still liquidate the account within 10 years but are not required to take annual distributions, offering more tax planning flexibility.

For example, if a designated beneficiary inherited an IRA in 2021 from someone who had begun RMDs, they would not need to take RMDs from 2022 to 2024 due to waivers. However, they must take annual RMDs from 2025 to 2030 and fully distribute the account by the end of 2031. If the deceased had not started RMDs, the beneficiary could choose not to take distributions from 2025 to 2030 as long as the account is fully liquidated by the end of 2031.

Additional Proposed Regulations and SECURE 2.0

In addition to the final regulations, the IRS has proposed further changes related to RMDs under SECURE 2.0. Key aspects of these proposed regulations include:

• RMD Age: Individuals born in 1959 must start taking RMDs at age 73.
• Annuity Purchases: Regulations on using part of a defined contribution plan to purchase an annuity.
• Designated Roth Accounts: Changes to distributions from these accounts.
• Corrective Distributions: Rules for correcting distribution errors.
• Spousal Elections: Guidelines for spousal elections after a participant’s death.
• Divorce and Longevity Annuities: Regulations on divorce-related issues and qualifying longevity annuity contracts.
• Trust Beneficiaries: Rules for outright distributions to trust beneficiaries.

These regulations are also set to take effect in 2025.

Work with a Professional

Navigating the complexities of RMDs from inherited IRAs and other defined contribution plans can be challenging. Although RMDs from inherited IRAs are not yet required under the new regulations, beneficiaries should consider taking distributions based on their tax situation. With numerous regulatory changes in recent years, it is crucial to stay informed and consult a professional for guidance. If you have inherited an IRA or a defined contribution plan and are uncertain about your RMD obligations, contact us for assistance.