IRS Publishes Final Rules on SECURE Act RMDs

Important clarification for inherited retirement accounts

On July 19, 2024, the US Treasury Department and the Internal Revenue Service (IRS) published final regulations providing guidance for the SECURE Act and SECURE Act 2.0 provisions related to required minimum distributions (RMDs) from qualified plan accounts and individual retirement accounts.

The final regulations adopt most of the provisions of the proposed regulations that were issued in February 2022, including the 10-year distribution period for inherited IRAs and qualified plan accounts where the beneficiary of the account is not an “eligible designated beneficiary.”

One of the issues clarified by the final regulations is whether a non-eligible beneficiary who inherited a retirement account from a participant who had started their own RMDs needed to continue taking RMDs annually. This provision in the proposed regulations sparked a lot of controversy because many beneficiaries of these accounts believed that the SECURE Act did not require annual distributions; rather the total account just had to be distributed by the end of the 10^th year following the death of the account owner.

The final regulations retained the provision in the proposed regulations requiring such a beneficiary to continue receiving annual distributions from the account with a final distribution due in the 10^th year. Under the final regulations, if the account owner dies after RMDs have begun, the remaining account must be distributed annually using the life expectancy of the beneficiary with final distribution in year 10 following the death. If the account owner dies before RMDs have begun, the beneficiary does not have to take yearly distributions but must still deplete the account by the end of the 10^th year.

This rule applies to accounts inherited after 2019. The IRS had previously issued transitional relief for this proposed regulation in Notices 2022-53, 2023-54, and 2024-35. Under these notices, the IRS announced that the new annual distribution rules would not apply until 2025. Any beneficiary that did not take distributions in tax years 2021-2024 would not be assessed penalties for failure to take RMDs. Distributions were not required for 2020 due to the COVID relief rules.

The final regulations state that this transitional relief does not extend the ten-year deadline.

Example
For an account inherited from a decedent who passed away in 2020 who had started their own RMDs, the beneficiary would not need to take RMDs for 2022, 2023, or 2024 but must begin taking distributions in 2025 with a final distribution prior to 2031.

Questions on how this may impact your inherited IRA or estate planning? Contact your Keiter Opportunity Advisor.