IRS Issues Final Regulations Surrounding RMDs for Inherited IRAs
Written by the Private Client Solutions Group of Raymond James Ltd.,
Beneficiaries of Inherited IRAs
If you inherited an IRA after December 31, 2019, or are set to inherit one soon, you need to know that the rules surrounding IRA inheritances have become more complicated for some designated beneficiaries. Most notably, a “10-year rule” applies to most non-spousal beneficiaries who receive inherited retirement accounts. This rule requires that beneficiaries of IRAs must liquidate the entire account by the end of the 10-year anniversary of the IRA owner’s death.
Treasury regulations require that beneficiaries under this 10-year clock, who inherit from an IRA owner who died after their Required Beginning Date, to take annual Required Minimum Beneficiary Distributions (RMBDs) in years 1-9. When these regulations were proposed, taxpayers were unsure if they were required to follow them and take an annual RMBD.
Now, final regulations (TD 10001) have been released which move forward with the proposed rules and will require RMBDs starting 2025.
Deaths After Original Owner’s Required Beginning Date
The 10-year rule went into effect for most non-spousal beneficiaries who inherit IRAs after December 31, 2019. Most industry professionals believed that the 10-year rule only required the account to be fully distributed by the end of the 10th year, without annual distributions. The proposed 2022 regulation added a required minimum beneficiary distribution to the equation for a subset of IRA beneficiaries: specifically, designated beneficiaries who inherit from an IRA owner who died after their Required Beginning Date. These beneficiaries would have to make an annual RMBD. If you an inherit from an IRA owner who died before their Required Beginning Date, only the 10-year rule applies, but there’s no RMBD.
RMBDs Now Required for Starting the 2025 Tax Year
RMBDs require you to withdraw funds at a specified amount and if not taken, penalties will apply. Given the uncertainties, lack of final regulations and request for transition relief, the IRS announced over various notices that those who did not take RMBDs in the 2021, 2022, 2023 and 2024 tax years will have penalties waived for not taking the distributions.
In the final regulations released in July 2024, Treasury and IRS addressed that RMBDs must be taken for designated beneficiaries (most non-spouse beneficiaries) starting 2025, and the account must be fully distributed by the end of the 10-year anniversary of the death of the original account owner. In other words – the penalty relief that was granted up to 2024 for not taking RMBDs will no longer be in effect starting the 2025 tax year.
What you should do
If this all sounds confusing, that’s because it is. If you inherited an IRA after December 31, 2019, and you’re unsure if or how this applies to you, meet with your financial advisor – and perhaps also a tax professional – to review your situation. They can tell you how to comply with the new rules and how to factor those pesky RMBDs into your long-term financial plan.
Sources: Department of Treasury and IRS - TD 10001, keiter; kiplinger; kitces; putnam wealth management.
Next Steps
If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please contact Snowbirds Wealth Management as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focused on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.
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