SECURE Act RMD Rules

Over the last couple of years, rules surrounding Required Minimum Distributions (RMD) and inherited accounts have been ever evolving. It all started when the SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law by Former President Trump on December 20, 2019, and then President Biden signed into law SECURE Act 2.0 on December 29, 2022.

Long story short, the RMD age is no longer 70 ½, and beneficiaries who inherit IRAs or employer sponsored defined contribution plans no longer stretch the IRA over their life expectancy.

*For the purpose of this commentary, I will be using IRA as shorthand because this rule pertains to IRAs (Traditional, Rollover, SIMPLE, SEP, Roth) and Employer- Sponsored Defined Contribution plans (401(k)s, 403(b)s, 457(b)s, profit sharing).*

Now, the RMD age is:

• 70 ½ for those born on or before 6/30/1949

• 72 for those born between 7/1/1949 – 1950

• 73 for those born between 1951 – 1959

• 75 for those born in or after 1960

While raising the RMD age was a clear, simple, and desirable change that was derived from this law, Newton’s Third Law states that for every action there is an equal and opposite reaction. Or, in our case today, a confusing, complex, and undesirable rule regarding the classification of beneficiaries to determine the set of rules to be followed for the management of inherited assets by the IRS. This includes the infamous 10-year rule.

If I’m being honest, it’s been quite the headache to keep track of. We thought we had a good beat on the new regulations but turns out part of the headache was that the IRS wasn’t explicit enough when they first issued SECURE Act 1.0. Recently, the IRS issued their final regulations that included explanations that address the distribution rules of inherited IRAs more concisely. Specifically, it cleared up whether certain beneficiaries are obligated to take an RMD or not. More on this later.

Before we get into the nitty gritty of what this means, let’s discuss some key terms. Feel free to jump over this section and reference it later.

We can break beneficiaries into 4 different categories:

1. Eligible Designated Beneficiary - Spouse

Once upon a time you went to the chapel and got married. Now, for better or worse, you consider that person your “spouse.”

2. Eligible Designated Beneficiary - Non-Spouse

• Chronically ill or disabled

• Minor child

Note: When the child reaches age 21, the rule switches to the 10-year rule. The child must deplete the account by the end of the 10th year in which he/she turns 31.

• Individual who is not more than 10 years younger than the original owner

Ex: A sibling or friend who is 70 and the original owner was 79.

3. Designated Beneficiary

Anyone who is named a beneficiary on your account but is not an eligible designated beneficiary. Super helpful definition, I know.

4. Non-Designated Beneficiary

An entity instead of a person.

Ex: Estate, Charities

You’ll notice that I didn’t include Trusts under any of the above categories. Depending on the language of the Trust, it can fall under any of the 4 listed categories. It’s best to discuss with your estate and financial planner to ensure you achieve your desired outcome when listing a Trust as a beneficiary.

Required Beginning Date (RBD) vs. Required Minimum Distribution (RMD)

• Your required beginning date depends on the account holder’s RMD age, which is April 1st the year after you turn 73 (this age may change depending on your DOB). If an IRA owner dies after reaching age 73, but before their RBD, no minimum distribution is required that year because the death occurred before the RBD. Your required minimum distribution is the minimum amount that you’re required to withdraw from your tax-deferred account(s) each year and pay ordinary income taxes on the withdrawal.

Ex: Let’s say John Sample has a date of birth of 3/10/1951. John’s RBD is 4/1/2025. If John passes away on 6/30/2024, then John’s beneficiaries are not required to take an RMD in the year of death because the death occurred before his RBD.

• 10-Year Rule

The beneficiary of an inherited IRA must withdraw the entire account balance by 12/31 of the year containing the 10th year anniversary of the account owner’s death.

Ex: If an owner dies in 2023, the beneficiary needs to fully distribute the account by 12/31/2033.

Phew…Are you bored yet? Maybe it’s time to stretch your legs and go for a walk. Yes, to the fridge and back counts in my book!

For those of you who wanted to jump ahead, pick up below:

As the rules stand today, the breakdown below outlines how beneficiaries are to handle the inherited assets if the original account owner passed away January 1, 2020 or after. Pre-SECURE Act rules are still intact and have been grandfathered in for deaths that occurred prior to 2020. I have included the most likely outcomes for each type of beneficiary. Other options can include a spouse or eligible designated beneficiary opting to use the 10-year rule, or any beneficiary taking a lump sum.

The main message—designated beneficiaries who inherit an IRA after the original account owner has started taking their RMDs must take an annual RMD AND deplete the account by the end of the 10th year.

DO NOT PANIC if you think this may apply to you and you haven’t been taking a RMD since 2021. The IRS is providing transitional relief that will postpone the RMD requirement until 2025. In other words, no RMDs are necessary from 2021- 2024. Reminder that in 2020, the CARES Act waived RMDs due to COVID. The transitional relief however does not extend to the 10-year rule, so an account inherited in 2020 still needs to be fully distributed by 12/31/2030.

Clear as mud? Good! Your respective advisor plans to quiz you over this next time you see them. All joking aside, handling inherited IRAs for clients has never been trickier, but rest assured we’ll get you taken care of.