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For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the \u201c10-year rule\u201d for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice\u00a02024-35 that forthcoming final regulations for the rule will apply for the purposes of determining RMDs from such accounts in\u00a02025.<\/p>\n
Beneficiaries face RMD rule changes<\/strong><\/p>\n The need for the latest guidance traces back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other changes, the law eliminated so-called \u201cstretch\u00a0IRAs.\u201d<\/p>\n Pre-SECURE Act, all beneficiaries of inherited IRAs were allowed to stretch the RMDs on the accounts over their entire life expectancies. For younger heirs, this meant they could take smaller distributions for decades, deferring taxes while the accounts grew. They also had the option to pass on the IRAs to later generations, which deferred the taxes for even\u00a0longer.<\/p>\n To avoid this extended tax deferral, the SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only \u201celigible designated beneficiaries\u201d (EDB) may stretch payments over their life expectancies. The following heirs are\u00a0EDBs:<\/p>\n All other heirs (\u201cdesignated beneficiaries\u201d) must take the entire balance of the account within 10\u00a0years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) for RMDs. (In 2023, the age at which account owners must start taking RMDs rose from age\u00a072 to age\u00a073, pushing the RBD date to April\u00a01 of the year after account owners turn\u00a073.)<\/p>\n In February\u00a02022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. They provide that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. In other words, they aren\u2019t permitted to wait until the end of 10\u00a0years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and could push them into higher tax brackets during those\u00a0years.<\/p>\n Confusion reigns<\/strong><\/p>\n It didn\u2019t take long for the IRS to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. How? Beneficiaries could have been dinged with excise tax equal to 25% of the amounts that should have been distributed but weren\u2019t (reduced to 10% if the RMD failure is corrected in a timely manner). The plans could have been disqualified for failure to make\u00a0RMDs.<\/p>\n In response to the concerns, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the\u00a0RBD.<\/p>\n The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around \u2014 and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the\u00a0RBD.<\/p>\n Now the IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won\u2019t be assessed a penalty on missed RMDs, and plans won\u2019t be disqualified based solely on such missed\u00a0RMDs.<\/p>\n Delayed distributions aren\u2019t always best<\/strong><\/p>\n In a nutshell, the succession of IRS waivers means that designated beneficiaries who inherited IRAs or defined contributions plans after 2019 aren\u2019t required to take annual RMDs until at least 2025. But some individuals may be better off beginning to take withdrawals now, rather than deferring them. The reason? Tax rates could be higher beginning in 2026 and beyond. Indeed, many provisions of the Tax Cuts and Jobs Act, including reduced individual income tax rates, are scheduled to sunset after 2025. The highest rate will increase from 37% to 39.6%, absent congressional action.<\/p>\n What if the IRS reverses course on the 10-year rule, allowing a lump sum distribution in the tenth year rather than requiring annual RMDs? Even then, it could prove worthwhile to take distributions throughout the 10-year period to avoid a hefty one-time tax bill at the\u00a0end.<\/p>\n On the other hand, beneficiaries nearing retirement likely will benefit by delaying distributions. If they wait until they\u2019re no longer working, they may be in a lower tax bracket.<\/p>\n Stay tuned<\/strong><\/p>\n The IRS stated in its recent guidance that final regs \u201care anticipated\u201d to apply for determining RMDs for 2025. However, based on the tax agency\u2019s actions in the past few years, skepticism about that is understandable. We\u2019ll continue to monitor future IRS guidance and keep you informed of any new developments.<\/p>\n \u00a9 2024<\/em><\/p>\n <\/body> For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the \u201c10-year rule\u201d for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice\u00a02024-35 that forthcoming final regulations for the rule will apply for the purposes of determining […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,59,10],"tags":[8,11,12],"class_list":["post-16944","post","type-post","status-publish","format-standard","hentry","category-articles","category-etra","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16944","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16944"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16944\/revisions"}],"predecessor-version":[{"id":16945,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16944\/revisions\/16945"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16944"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16944"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16944"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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