Beneficiaries of retirement savings have been in limbo for the past 4½ years because the SECURE Act of 2019 (1.0) radically changed the beneficiary distribution rules and the Treasury/IRS proposed an interpretation of those rules that was unexpected and never finalized. That uncertainty ends now, as the IRS finalized its regulations on the required minimum distribution (RMD) and beneficiary distribution rules under SECURE 1.0. The final regulations primarily confirm the proposed interpretations and apply beginning January 1, 2025.
The question
SECURE 1.0 changed the rules so that most types of beneficiaries inheriting a retirement plan account or IRA in 2020 or later must deplete the inherited account by the end of the 10th year after the account holder’s death. (The only beneficiaries who can stretch payments over their life expectancy are spouses, and those who are less than 10 years younger than the account holder, disabled or chronically ill,) The wording in SECURE 1.0 led many in the industry to believe the 10-year rule would apply in the same way as the old 5-year rule so that beneficiaries could take distributions at any time, including waiting until the 10th year.
The IRS’s proposed regulations, however, indicated that beneficiaries whose only option is the 10-year rule and who inherit from an account holder who died after they had reached the beginning date for taking RMDs must take a life expectancy payment each year in addition to depleting the account by the end of the 10th year. But because that interpretation wasn’t published until 2022 and has since remained just a proposal, it hasn’t been clear whether those beneficiaries need to take a payment each year. Due to this confusion, the IRS has waived the excise tax for beneficiaries in this category who did not take a required payment in 2021, 2022, 2023 or 2024.
The answer
The final regulations confirm the proposed interpretation of the 10-year rule for beneficiaries whose only option is the 10-year rule:
- If the account holder died BEFORE their required beginning date for RMDs, the beneficiary may take distributions at any time so long as the inherited account is depleted within 10 years.
- If the account holder died AFTER their required beginning date for RMDs, the beneficiary must take annual distributions based on the longer of their life expectancy or the account holder’s remaining life expectancy AND deplete the inherited account within 10 years.
The preamble to the regulations also confirms that beneficiaries affected by this issue don’t have to go back and take any missed distributions, but they must still count the years 2021–2024 in their 10-year countdown. For example, if an IRA owner died in 2020, the beneficiary’s 10-years to deplete the account expires at the end of 2030.
Financial advisors and financial institutions can now confidently assist clients with investment and tax strategies surrounding the timing of beneficiary distributions under the 10-year rule.
Stay tuned
The final regulations are lengthy and include other notable clarifications. The IRS also published proposed regulations to implement the additional changes for RMDs and beneficiaries made by SECURE 2.0. IRALOGIX will continue analyzing both sets of regulations and will provide more details in the coming months.