Distributing an Inherited IRA: Crucial Rules to Understand for 2025
In a significant shift for U.S. retirement account rules, the SECURE 2.0 Act has brought about several changes that impact beneficiaries of inherited IRAs. One of the most notable changes is the implementation of a "10-year rule" for many beneficiaries, which was delayed until this year, 2025, by the IRS.
Under this rule, most non-spouse beneficiaries who inherited IRAs on or after January 1, 2020, must empty the account within 10 years of the account owner's death. However, there are exceptions for certain beneficiaries known as "eligible designated beneficiaries" (EDBs) who can stretch their RMDs over their lifetime instead. These beneficiaries include the surviving spouse, disabled individuals, chronically ill individuals, minor children of the account owner (until they reach the age of majority), and beneficiaries not more than 10 years younger than the account owner.
The RMD amount each year for these beneficiaries can vary based on several factors, including their age, relationship to the deceased, and the value of the inherited account. It's crucial for inherited IRA beneficiaries to consult a tax adviser to determine the correct RMD schedule.
The IRS has also waived penalties for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023, as well as for missed RMDs in 2024 from IRAs inherited in 2023, provided the deceased owner was already subject to RMDs.
If the original account owner had begun taking RMDs before their death, the beneficiary usually needs to continue taking annual distributions while complying with the 10-year rule. The IRS final regulations on inherited IRAs confirm that beginning this year, 2025, many beneficiaries will face annual required distributions during the 10-year period.
The SECURE Act of 2019 has also resulted in many beneficiaries being unable to extend inherited IRA distributions through their lifetimes. Additionally, the minimum age for required minimum distributions (RMDs) was raised to 73 under the SECURE 2.0 Act.
Inherited IRAs and tax laws can be complex, and individual circumstances vary, so seeking professional guidance can help beneficiaries make informed decisions. The complexity and potential consequences of missed RMDs have raised concerns about the "10-year rule" for unsuspecting beneficiaries. It's essential for beneficiaries to stay informed and consult a tax adviser to ensure they are compliant with the new rules.
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