The Internal Revenue Service and the Treasury Department have released the much-anticipated final regulations on Required Minimum Distributions. The new rules, which will take effect on January 1, 2025, address changes brought by the SECURE Act of 2020 and the SECURE 2.0 Act signed into law at the end of 2022. One of the most significant clarifications involves the 10-year rule for beneficiaries of individuals who had already begun taking RMDs.
The final regulations confirm that these beneficiaries must continue to take RMDs each year, except “eligible designated beneficiaries” with other options for managing an inherited IRA. The SECURE 2.0 Act also made a crucial amendment regarding Roth 401(k)s. Starting in 2024, Roth 401(k)s will be exempted from the RMD requirement, even though these withdrawals were not subject to income taxes.
Another area of concern was the age at which individuals born in 1959 must start taking RMDs. The final regulations clarify that the applicable age will be 73, with a public hearing on this matter scheduled for September 25, 2024.
Final regulations clarify inherited IRAs
Jeff Levine, Chief Planning Officer of Buckingham Wealth Partners, has been actively discussing the specifics of these regulations via social media. He notes that the age requirements for taking RMDs have changed multiple times, moving from 70.5 to 72 and now to 73—with a future increase to 75 set for 2033. In recent years, the IRS has allowed beneficiaries to forgo taking RMDs from inherited IRAs without penalty.
However, under the new regulations, beneficiaries must adhere strictly to the 10-year withdrawal period, with some exceptions for “eligible designated beneficiaries.”
While RMDs might not be required this year, some beneficiaries may still opt to take distributions to avoid potentially larger RMDs and higher tax liabilities in the future. When inheriting an IRA or a 401(k), it is crucial to navigate the rules carefully to avoid unintended distributions and lost opportunities for tax-deferred growth. For inherited IRAs, assets should be moved directly from one IRA to another via transfer to prevent the IRS from classifying the movement as a distribution.
If beneficiaries inherit a 401(k) or other qualified employer plans, they must roll them over to a beneficiary IRA via a direct rollover. The beneficiary IRA must also be titled correctly in both the beneficiary’s name and the deceased IRA owner’s name. Beneficiaries should consult a qualified professional managing their inherited assets to ensure compliance with the latest regulations and optimize their financial planning strategies.
