The new RMD rules you need to know about

Q:

I recently inherited a retirement account from my father, who had already started taking his Required Minimum Distributions. I’ve heard there are new IRS rules about RMDs for inherited accounts. Can you explain how these changes might affect me and what I need to do to comply with the new regulations?

A:

First, let us say how very sorry we are about your loss. Having to deal with financial issues can add to an already emotional and overwhelming time. But you are correct about there being new RMD rules for inherited accounts. And though everyone’s situation is unique, here’s an overview of the changes you should know about.

Background on RMD Changes

The changes stem from the SECURE Act of 2019 and its successor, SECURE 2.0 of 2022. These acts aimed to enhance the U.S. retirement system by adjusting the RMD age and altering distribution requirements for inherited accounts. The IRS has recently clarified these rules and provided more specific guidance on how beneficiaries should handle RMDs.

Key Developments in the Final Regulations

First, you should be aware of the year-of-death requirement. If your father didn’t take his RMD in the year in which he died, you, as the beneficiary, need to take it by Dec. 31 of the year after he died.

Now, let’s look at the 10-year rule. If your father passed away in 2020 or later, the SECURE Act says you need to fully distribute that account within 10 years.

As you mentioned, your father already started taking RMDs, so you must keep taking those for the first nine years and then distribute whatever’s left by the end of the 10th year.

There is category of beneficiary called Eligible Designated Beneficiaries. EDBs have more flexible options – they can either follow the 10-year rule or stretch out the distributions over their lifetime based on their life expectancy. Some of the qualifications, such as surviving spouse, minor child, or beneficiaries who are not more than 10 years younger than the deceased, would not apply in your case. However, if you are disabled or chronically ill, you may qualify as an EDB, and would then have more options for managing the RMDs.

It's also good to know about the changes regarding penalties. The penalty for not taking an RMD has been reduced from 50% to 25%. And if you do forget to take one, as long as you correct the mistake within two years, the penalty can be further reduced to 10%.

One last note: Starting in 2024, Roth 401(k) account holders won’t need to take RMDs during their lifetime anymore. However, this change doesn’t affect inherited Roth IRAs, which still need to follow the 10-year rule for non-spouse beneficiaries.

Strategic considerations for your RMDs

Managing an inherited retirement account under these new rules requires careful planning to minimize tax liabilities and optimize your financial strategy. Here are some tips:

• Plan your distributions: If you inherit a significant amount, consider spreading the distributions evenly over the 10 years to avoid a large tax hit in any single year. This approach can help keep your taxable income in a lower bracket.
• Understand your options: If you qualify as an EDB, evaluate whether it’s more beneficial to stretch distributions over your lifetime or follow the 10-year rule. This decision can have long-term tax and financial planning implications.
• Coordinate with professionals: Work with your planner and a tax professional to develop a strategy that aligns with your financial goals and seeks to minimize your tax burden. They can help you understand the implications of the new rules and make informed decisions.

Putting all the pieces together

The new IRS regulations on RMDs for inherited accounts introduce several important changes that beneficiaries need to understand. By staying informed and working with financial and tax professionals, you can navigate these rules more effectively and make the most of your inherited retirement account.

If you have any further questions or need personalized advice, don’t hesitate to reach out to your planner. They are there to help you make the best decisions for your financial future.

WE HOPE YOU’VE FOUND THIS INFORMATION HELPFUL

Remember that any financial guidance must be adapted to your unique circumstances, so consult your financial planner. In the meantime, keep those questions coming!