10-Year Required Minimum Distribution Rule Finalized By The IRS
In 2019, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was passed and went into effect in 2020. Click here for the full SECURE ACT. The SECURE Act established that many people who inherited individual retirement accounts (“IRA”) or 401(k)s had to take the money out of the account within 10 years. This has become known as the 10-year rule. The SECURE Act was unclear whether beneficiaries had to take the annual required minimum distribution, yearly during the 10 years following the original account holder’s death or if they could wait until the final year to take out all of the funds from the account. Recently, the Internal Revenue Service (“IRS”) has published their final rules that will take effect in 2025, that require minimum distributions need to be taken out yearly. Highlights of the final rules are discussed below. See published final IRS rules here.
WHAT IS A REQUIRED MINIMUM DISTRUBTION?:
The IRS requires that most owners of IRAs withdraw part of their tax-deferred savings each year, starting at age 73 or after inheriting any IRA account for individual beneficiaries other than eligible beneficiaries. The required withdrawal is known as a required minimum distribution (“RMD”).
ELIGIBLE BENEFICIARIES:
Whether the 10-year rule for RMDs applies depends on whether the beneficiary is eligible or ineligible.
Eligible beneficiaries include:
- Surviving spouses
- Minor children (under age 21)
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased
The 10-year rule is not mandatory for eligible beneficiaries. If the original participant had yet to begin taking RMDs, then an eligible beneficiary can either choose to take RMDs consistent with their life expectancy or elect the 10-year rule. If the participant dies after taking RMDs, then the beneficiary can take RMDs consistent with the longer of their life expectancy or that of the participant. A partial exception from the 10-year rule is made for heirs younger than 21. Their 10-year clock starts when they turn 21. In cases where a participant had left assets to multiple minor children, a complete distribution is not required until ten years after the youngest of the beneficiary’s children, who are designated beneficiaries, attains the age of 21.
INELIGIBLE BENEFICIARIES:
The 10-year rule is mandatory for ineligible beneficiaries which include adult children, relatives other than spouses and their minor children, and others unrelated to the deceased original account owner. Additionally, if the original account owner was subject to RMDs before their death, the beneficiary must also take annual RMDs throughout the 10-year period and fully distribute the account by the end of the 10th year.
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