The Secure Act is a 2019 law that introduced a series of changes to individual retirement accounts. One of the significant changes was how required distributions were to be made from inherited IRAs. A series of proposed regulations were issued by the IRS in 2022 relating to the implementation of the Secure Act. On July 19, 2024, the final regulations were issued by the IRS.
A required minimum distribution (RMD) is the minimum amount that must be withdrawn from an individual retirement account each year. The IRS requires RMDs be taken from most retirement accounts, including traditional IRAs, once a person reaches a certain age. The purpose of RMDs is to ensure that investments in retirement accounts don’t grow tax-deferred indefinitely.
Currently, the required beginning date for taking a distribution (RBD) is April 1 of the year following the later of two possible triggering dates. Those triggering dates are: (1) the year the account owner reaches the applicable age or (2) the year the account owner retires. The applicable age for taking required distributions depends on when you were born:
- 70-1/2 for those born before July 1, 1949;
- 72 for those born on or after July 1, 1949, and before January 1, 1951;
- 73 for those born on or after January 1, 1951, and before January 1, 1959; and
- 75 for those born on or after January 1, 1960.
Prior to 2020, an individual who inherited an IRA could draw down the IRA benefits over the course of their lifetime, commonly known as “stretching” the IRA benefits. This avoided taxation and allowed for additional growth in the IRA. One of the Secure Act provisions ended the lifetime “stretch” IRA for most beneficiaries, requiring the account to be withdrawn over a 10-year period.
There are several exceptions to the new rule. The following “eligible designated beneficiaries” can continue to stretch an IRA over their lifetime:
- A surviving spouse;
- A minor child who has not reached the age of 21;
- A disabled or chronically ill individual (as defined in the regulations);
- An individual who is not more than 10 years younger than the account owner;
- A non-designated beneficiary such as a charity, estate, or non-see through trust;
- Accounts inherited before 2020.
The new regulations are to take effect on January 1, 2025. There was a waiver of the penalties for not taking the RMD in accordance with the Secure Act for the years 2021 through 2024. However, if you have inherited an account during that time frame, the new rules apply to those accounts.
The new rules clarify one of the most debated questions – “If you are required to draw down the inherited account in 10 years, do you have to take a RMD each year or can you defer liquidating the account until year 10?”. The answer depends on when the account owner died:
1) If the account owner dies before their required minimum distribution start date, the beneficiary does not have to take an annual RMD and can wait until year 10 to cash out the account;
2) However, if the account owner dies after their required minimum distribution start date, then the beneficiary is required to take the RMD, starting the year after the account owner dies. Additional amounts beyond the RMD can be taken out each year or deferred until year 10.
There is a 25% penalty for those who do not take the RMD each year. If you have inherited an IRA since 2020, you should make sure that you are scheduled to start taking the RMD in 2025 unless you are an exempt beneficiary.
