On July 18, 2024, the IRS released final regulations on required minimum distributions (RMDs) and beneficiary options. These final rules have been anticipated since February 2022, when proposed regulations were published. Significant changes have occurred because of the SECURE Acts, both version 1.0 in 2019 and version 2.0 in 2022. In these new regulations, the IRS has now given us their interpretation of the SECURE Acts’ various statutory provisions. In addition to the final RMD rules, the IRS has also released proposed regulations that cover some of the more complicated provisions in SECURE2.0. This will give interested parties an opportunity to weigh in with comments before these proposed regulations are made final.
Some Provisions Remain the Same
In the 260 pages of final regulations, you would expect some items to change—and they have. But some important provisions are staying the same as in the proposed regulations.
Only Eligible Designated Beneficiaries Can Use the Stretch IRA
If an IRA owner passed away before 2020—that is, before many of the new RMD rules took effect—their beneficiaries could normally take distributions over their own life expectancies. But if the IRA owner passed in 2020 or later, the beneficiaries that are allowed to stretch payments over their life expectancy have shrunk considerably. Now, a beneficiary must be an eligible designated beneficiary, or EDB, to take advantage of the “stretch IRA” option EDBs include:
- The IRA owner’s surviving spouse,
- A minor child of the IRA owner,
- A disabled or chronically ill beneficiary,
- A beneficiary who is not more than 10 years younger than the IRA owner, or
- A beneficiary if the IRA owner died before 2020.
Individuals who are not EDBs must generally deplete their interest in the decedent’s IRA by the end of the 10th anniversary year of the IRA owner’s death. Congress intended this provision to increase near-term tax revenue.
Annual RMDs Under the 10-Year Rule
One of the biggest changes in the proposed regulations was a new requirement for those beneficiaries who are subject to the 10-year payout rule. The SECURE 1.0 Act required certain beneficiaries, known as “non-eligible designated beneficiaries,” to deplete the IRA owner’s account within 10 calendar years following the owner’s death. But if the IRA owner had reached the required beginning date for taking RMDs, an additional rule applies—not only must the account be depleted within the 10-year time frame, but annual RMDs must be taken during the first nine years, generally based on the beneficiary’s life expectancy.
Although several comments to the IRS suggested doing away with this new rule, the IRS responded by stating that its hands were tied; the language in the statute says that, once RMDs have commenced, beneficiaries must take distributions “at least as rapidly” as the IRA owner. This means that the RMDs must continue during the 10-year period. Despite its complexity and the confusion that it has caused, this rule remains in effect under the final regulations.
Revised Provisions in the Final Regulations
As you might expect, within the final RMD regulations (and the proposed regulations), we find numeroussmaller changes. These changes may affect how you plan for your retirement and death, and how yourbeneficiaries must distribute your IRA assets.
Trust beneficiary rules have been revised. Many of the trust beneficiary rules are complicated, but one change may simplify things. The IRS will allow “see-through trusts” with multiple beneficiaries to be divided immediately upon the death of the IRA owner into separate trusts. Each sub-trust may then apply the RMD rules separately, rather than keying on the oldest trust beneficiary. Other trust changes may be addressed in future articles.
Spouse beneficiaries are allowed to “treat as own” at any time. The proposed regulations contained a deadline for spouse beneficiaries to treat the decedent’s IRAs as their own. This deadline was the later of (1) December 31 following the IRA owner’s death or (2) the end of the spouse beneficiary’s first distribution year(e.g., at age 73). The final rule allows spouse beneficiaries to treat a decedent’s IRA as their own at any time if they do not transfer any amount that they would have been required to distribute based on their own age.
Certain IRA documentation may not be needed. The proposed regulations required beneficiaries who were disabled or chronically ill to provide supporting documentation by October 31 of the year following the IRA owner’s death. Similarly, the trustee of a see-through trust had to submit certain documents by September 30 of the year following death. This documentation requirement for IRAs has been removed from the final regulations.
Distributions from qualified plans to nonspouse beneficiaries are subject to 20% withholding. The final regulations require administrators of certain retirement plans (e.g., 401(k) plans) to withhold 20% from a distribution that is paid directly to an inherited IRA. Such beneficiaries could not roll over assets paid to them in a 60-day rollover – but because they could have directly rolled over the assets rather than receiving the payment themselves, the IRS now requires this pre-payment of tax on non-IRA retirement plan distributions to nonspouse beneficiaries.
More to Come
In the final rules, the IRS has made many minor changes to the 2022 proposed regulations. Most of them may have little effect on IRA administration, while some may make a noticeable difference.