Joseph P. Marmorato also contributed to this blog post.

Have you ever experienced déjà vu where you feel like you have been in the same situation before? Well, our industry is starting to feel it when it comes to required minimum distributions (RMD) for inherited IRA accounts.

On April 16, 2024, the IRS issued Notice 2024-35 which, once again, removes the penalty for not taking the annual RMD for qualifying inherited IRA accounts. The IRS issued similar notices for years 2020 thru 2023. In the latest notice, the IRS stated they expect to finalize these rules proposed under the SECURE Act regulation later this year. Hopefully our industry and those with inherited IRA accounts will receive the clarification they have been looking for before the end of this year.

So who does this affect and what does this really mean? Let’s recap the impact the SECURE Act has had on inherited IRA accounts.

Prior to the SECURE Act, when an individual inherited an IRA account, they were able to stretch distributions from the account over their lifetime. Each year, a percentage of the account needed to be distributed but the remaining balance could be left in the account and continue to grow. The IRS originally created these tax deferred or tax free IRA accounts for the benefit of the owner, not as a multi-generational legacy tool, but that is what they have turned into for many families. The SECURE Act included provisions to change this by requiring all funds need to be distributed within ten years of the owner’s death, but there was still some confusion when it came to an annual distribution requirement. Did the beneficiary have to follow the 10 year rule AND take an annual distribution as well?

The IRS drafted Notice 2022-53 to offer additional clarification. They noted that if a beneficiary is subject to the 10-year rule (i.e.: a non-eligible designated beneficiary) and the original account owner was subject to RMDs, the beneficiary must also take RMDs based on their own life expectancy for years 1-9, beginning in the year after the account owner’s death. The inherited account must then be liquidated entirely in the 10th year following the year of the account owner’s death.

As you can see, there have been changes and clarifications to the inherited IRA account RMD requirements ever since the SECURE Act was released. The transition relief noted above in Notice 2024-35 means that while the IRS is still finalizing the regulations, any non-eligible designated beneficiary who inherited an IRA on or after January 1, 2020, will not be penalized for not taking an annual RMD in the 2024 tax year. These RMDs will be mandated beginning with the 2025 tax year, assuming these rules make it into the final regulations.

There are some individuals who are not impacted at all with the recent notices and regulations. The first group are those individuals who received an inherited IRA prior to 1/1/2020. Those RMDs are still required and there is a penalty for not taking them. The second group would be for eligible designated beneficiaries of inherited IRAs received after 1/1/2020. These include five groups: spouses, minor children, disabled individuals, chronically ill individuals, and individuals older than or not more than 10 years younger than the original owner. This group must also take the RMD in 2024 or face a penalty.

To better understand the requirements, below are two common examples.

Grandpa who is 78 dies on 5/1/2023 and names his son who is 45 as the beneficiary on his Traditional IRA account. Because grandpa was taking RMD distributions from his IRA prior to his death, his son must continue to take an RMD annually and fully distribute the account balance by 12/31/33.

Grandpa who is 78 dies on 5/1/2023 and names his spouse who is 73 as the beneficiary on his Traditional IRA account. Because grandma is his spouse, she has the ability to stretch the required distributions over her lifetime and does not have to fully distribute the account in the next ten years. If she lives to 93, she would only have to take an RMD annually and the balance would still continue to grow tax-deferred until her death.

Each individual’s situation is different and there are a lot of factors to take into consideration. It depends on the owner’s age and date of death, plus the beneficiary’s status and age. There isn’t a cookie-cutter answer when it comes to inheriting a Traditional or a Roth IRA. If you find yourself in this situation, it is recommended to work with a trusted professional so you understand all of your options and how this inherited account can best fit into your financial plan.

Author Anne M. Mank Director of Financial Planning

Anne co-hosted the weekly radio show, Money Sense, and is a Certified Integrative Holistic Coach.

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