Update for RMDs for Inherited IRAs

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In April 2024, the Internal Revenue Service clarified rules related to certain inherited retirement plans. This applies to plan holders who have died during or after 2020. The Secure Act, enacted in 2019, provided that most non-spouse beneficiaries who inherited plan assets could no longer stretch required minimum distributions (RMDs) over their lifetime but instead would require distribution under 10-year rule.

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On February 23, 2022, the IRS released their proposed new regulations that incorporate the changes brought about by the Secure Act. There is a key clarification that has been provided by these regulations. Before, it was thought that the rule was simply the account must be emptied by the end of the tenth year following year of death. Now it seems that there must be an annual distribution. To date, including the latest guidance earlier this year, the IRS continues to assert that there has been an annual RMD requirement for years 2021-2024. The IRS also acknowledges that there has been confusion and criticism.

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The IRS has waived penalties that are applicable to RMDs for these inherited plan assets for years 2021-2024. The 2022 proposed regulation has yet to be finalized but the IRS seems to be signaling that this regulation will be finalized soon, and that annual distributions will apply in most cases for non-spouse beneficiaries. 

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The key takeaways are 1: As 2025 progresses, taxpayers should pay attention to make sure no penalties are triggered and 2: If taxpayers are holding post-2019 inherited retirement plans, they should develop a strategy for liquidation that includes how the deferred retirement plan income affects their income status in the remaining years of the ten year payout period. The annual RMD requirement is a pesky administrative detail. The main question is: if the inherited assets are significant is there a plan to manage associated significant income tax?