The IRS mandates that beneficiaries of inherited retirement accounts, such as IRAs and 401(k)s, take Required Minimum Distributions (RMDs) according to specific rules. Failing to comply with these requirements can lead to significant tax penalties. Understanding and adhering to these rules is essential.

RMD Rules for Accounts Inherited Before 2020

If an account was inherited from someone who passed away before January 1, 2020, beneficiaries typically had the option to stretch distributions over their lifetime. This allowed for smaller, more manageable withdrawals and potentially lower tax implications over time.

Impact of the SECURE Act on Inherited Accounts After 2020

For accounts inherited on or after January 1, 2020, the SECURE Act of 2019 changed the landscape. Most non-spouse beneficiaries must now withdraw the entire balance within 10 years of the account holder’s death. This new rule accelerates the distribution timeline, which could lead to higher taxes in a shorter period.

Certain eligible designated beneficiaries, such as spouses, minor children, disabled individuals, and those not more than 10 years younger than the original account holder, may still have the option to stretch distributions over their lifetime. Surviving spouses, in particular, have additional options, including the ability to treat the inherited IRA as their own.

Special Considerations for Roth IRAs

Roth IRAs differ from traditional IRAs in that there are no RMDs for the original owner. However, beneficiaries of Roth IRAs generally must follow similar distribution rules as those for traditional IRAs. It is crucial to understand these rules to avoid unnecessary penalties.

Legislative Updates and Enforcement of New RMD Rules

Recent legislative changes have further updated the RMD rules, with the IRS finalizing its enforcement regulations in July. Beneficiaries of IRAs inherited after December 31, 2019, are now subject to RMDs under these new rules. The IRS introduced a 10-year limit for depleting the account, with certain exceptions.

Although RMDs were waived from 2021 to 2024, the IRS will start enforcing them in 2025 for accounts inherited from owners who were already taking RMDs. Beneficiaries will need to fully deplete their inherited IRAs by 2030, with minimum withdrawals required from 2025 to 2029.

Benefits for Older Beneficiaries

Older beneficiaries who inherit an IRA from someone younger than themselves can take advantage of smaller RMDs based on the original owner’s life expectancy rather than their own. This approach allows for smaller distributions over a longer period, avoiding the 10-year rule. However, it could shift the tax burden to their own beneficiaries, who may face higher RMDs and the 10-year rule.

Special Case for Individuals Born in 1959

The SECURE 2.0 Act created a unique situation for individuals born in 1959 regarding the start of their RMDs. Although the RMD age gradually increases to 75 for those born in 1960 or later, the IRS has proposed that those born in 1959 begin taking RMDs at age 73. Delaying the first RMD until April 1 of the following year could result in two distributions within one year, potentially increasing tax liability. Therefore, careful planning is recommended.

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