Changes to Beneficiary IRAs and their Required Minimum Distributions (RMDs)
The landscape surrounding Beneficiary IRAs and Required Minimum Distributions (RMDs) has finally been made clear.
Removal of the “Stretch IRA” Provision for Most Beneficiaries: one of the most significant changes to IRAs in a long time happened a few years ago and involves the elimination of the "stretch IRA" provision for most non-spouse beneficiaries. Under previous rules, non-spouse beneficiaries could stretch the distribution of inherited IRAs over their lifetime, which allowed for the potential to defer taxes on distributions for decades. Now, inherited IRAs must be fully distributed within 10 years following the death of the original account holder. This rule applies to beneficiaries such as adult children, siblings, and others who are not the spouse of the decedent. The 10-year period begins in the year after the account holder’s death.
CLARIFICATIONS: After years of confusion, the IRS has simplified what it requires during the ten years leading up to the full payment deadline. The IRS has now confirmed that most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the tenth year. The amount of the annual RMD depends on many different elements including age of the original owner of the IRA, withdraw status, and the beneficiary age.
Exceptions Removing the Stretch IRA: while the 10-year rule applies to the majority of beneficiaries, there are certain exemptions. These include:
Spouses: A surviving spouse has the option to roll the inherited IRA into their own IRA or begin RMDs based on their own life expectancy, as has been the case in the past.
Minor Children: If the beneficiary is a minor child, they can take distributions over their lifetime, but once they reach the age of majority, the 10-year rule applies.
Disabled or Chronically Ill Beneficiaries: If the beneficiary is disabled or chronically ill, they are permitted to continue stretching the distributions over their lifetime.
Beneficiaries within 10 years of the original account holder’s age: If a beneficiary is within 10 years of the original account holder’s age, they may be able to take distributions based on the account holder’s life expectancy.
CLARIFICATIONS on Exceptions: For these exemptions a clarification has finally been made: there is still an RMD requirement, but the ten-year rule does not apply. Meaning, take money out each year but the new account owner does not need to empty the account over ten years. The specific calculation of the RMD depends on the particular exemption and status of the IRA prior to the original owner’s death.
As these new rules take effect in 2025, please contact our office if you have any questions about how this might apply to you or your heirs.