The final regulations concerning Required Minimum Distribution (RMD) have been released by the Internal Revenue Service (IRS) for beneficiaries under the 10-year rule. Millions of Americans who are retirees are impacted by the significant changes that the Internal Revenue Service (IRS) made to the 10-Year Rule.
These modifications are part of the more extensive updates made possible by the Setting Every Community Up for Retirement Enhancement (SECURE) and SECURE 2.0 Acts. These regulations confirm that most IRA beneficiaries must take distributions annually over the 10 years following the account holder’s death.
The SECURE Act 2019 introduced the 10-Year Rule to enhance Americans’ retirement security. This regulation requires beneficiaries of inherited retirement accounts to take out the whole amount ten years after the initial account holder dies. The regulation covers a range of retirement accounts, such as 401(k) plans, Roth IRAs, and conventional IRAs.
Key Changes and Clarifications
Recent updates to the 10-Year Rule have clarified several aspects that were previously confusing retirees and financial planners. One major clarification is the annual Required Minimum Distributions (RMDs) requirement for certain beneficiaries. Others are;
- Non-eligible designated beneficiaries subject to the 10-year rule must take RMDs each year.
- Beneficiaries who started required annual distributions are to continue these distributions, even if the account balance is fully distributed within 10 years.
The IRS has clarified that if the original account holder died after their Required Beginning Date (RBD)—generally April 1 of the year following the year they turn 72—the beneficiaries must take annual RMDs and withdraw the entire balance by the end of the tenth year. This clarification overturned the previous consensus that beneficiaries only needed to withdraw the full amount by the tenth year without taking annual distributions.
In response to the confusion caused by the initial introduction of the 10-Year Rule, the IRS has provided penalty relief for beneficiaries who missed RMDs in 2021 and 2022. Beneficiaries will not face the 50% excise tax penalty typically imposed for failing to take RMDs in these years. However, moving forward, they must adhere to the annual RMD requirements to avoid penalties.
Financial Planning Adjustments
Retirees and their beneficiaries must revisit their financial planning strategies to accommodate the new annual RMD requirements. This may involve recalculating projected retirement income, adjusting investment strategies, and planning for potential tax impacts due to annual withdrawals.
The new rule also affects estate planning. Beneficiaries need to be aware of the timeline for withdrawals and the associated tax implications. Proper estate planning can help mitigate tax burdens and ensure that inherited assets are managed effectively.
Impact on Retirees and Beneficiaries
Ben Henry-Moreland, a senior financial planning nerd at Kitces.com, has noted that these rules will make retirement accounts “even more complicated.” For instance, spousal beneficiaries now have three different options for treating their deceased spouse’s retirement account, and each of these accounts has its own RMD calculation.
The lead financial planning nerd at Kitcescom, Jeff Levine, also highlighted that annual distributions during the 10-year rule are required if death occurred on or after the required beginning date (RBD). He also stated that this rule will not be applied until 2025 due to the previous IRS notices.
