IRS’s New Regulations on Required Minimum Distributions for Inherited IRAs 

Kate Hennessy CFP® |

When the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was passed in December 2019, it brought big changes to the post-death treatment of distributions from Individual Retirement Accounts (IRAs). One major change was eliminating the “stretch” treatment of distributions for most non-spousal inherited IRAs. Most of us will be impacted by this change if we are a named beneficiary on a non-spousal IRA & the owner of the IRA is deceased.

If you inherited a non-spousal IRA prior to the SECURE Act, you could “stretch” your taxable distributions out over your life expectancy. Because the distributions are taxed as ordinary income, by stretching the distributions over your lifetime you can control the impact of these distributions on your taxable income more effectively.  If you inherited a non-spousal IRA after the SECURE Act, you are now subject to the 10-Year Rule, which requires beneficiaries to fully distribute the account by the end of the 10th year following the original account owner’s death.

Since the passing of the SECURE Act in 2019, the message surrounding this change has been confusing.  In fact, beneficiaries that were required to take RMDs (Required Minimum Distributions) in 2021, 2022, 2023 and 2024 but didn’t do so will not be penalized according to the IRS. Since the IRS waived the penalties from 2021-2024, the clock effectively starts with RMDs required to be taken in 2025. That being said, if you inherited a non-spousal IRA in 2020 after the SECURE Act was passed, the IRA must still be completely withdrawn by the 10th year following the original account owner’s death. For some individuals that missed the RMDs from 2021-2024, they now have a shorter amount of time to withdraw from the IRA and this may adversely impact their taxable income.

If you have any questions about the new regulations or would like to discuss ways to minimize the impact of RMDs on your taxable income, please reach out to us for a conversation