If you’ve inherited an IRA from a non-spouse who passed away after 1/1/2020 AND they were old enough to be taking Required Minimum Distributions (RMDs) at the time they passed, there’s an important change you need to be aware of. The IRS has recently clarified how the 10-year payout rule works for non-spouse beneficiaries in this situation, and it could affect how you handle distributions starting in 2025.
The initial take on the IRS reg’s under the SECURE Act was that the IRA account had to be emptied by the end of the 10th year following death – true - but the final reg’s say that you ALSO have to take annual RMDs during that 10-year payout period, if the decedent had been required to take RMDs.
The IRS said this is because of the “at-least-as-rapidly rule,” which ensures that once RMDs start, they must continue after the account owner’s death, though the amount can vary.
Here’s the catch: for 2021-2024, the IRS waived the RMD requirement for beneficiaries under this rule, likely due to confusion around how it should be applied. However, the IRS has now issued final regulations, confirming that beneficiaries will have to begin their annual RMDs in 2025.
So, how do you calculate the RMD? Let’s look at an example to make it clearer.
In 2020, Jan inherited an IRA from her father David, who passed away at age 80. Since David died after his RBD, Jan must begin taking annual RMDs starting in 2025. To figure out the first RMD, we go back to the year following his death (2021), when Jan was 56. The IRS Single Life Table gives a life expectancy of 30.6 years for a 56-year-old. From there, we subtract 1.0 each year until 2025, which gives Jan a life expectancy of 26.6 years for her 2025 RMD. Each subsequent year, she subtracts another 1.0 from the previous year’s life expectancy through December 31, 2030.
But wait, that won’t be enough to empty the account by the end of the 10th year following inheritance, which you need to fulfill the second part of the rule. That is its own tax-planning strategy! With federal tax rates remaining relatively low, it makes sense to plan out your 10 year distribution strategy to avoid a huge tax bill in the final year when the IRA must be emptied.
The key takeaway here? If you’re inheriting an IRA under the 10-year rule and the account holder died after their RBD, you’ll need to start your annual RMDs in 2025. Planning ahead can help minimize your tax burden and avoid unnecessary penalties. Questions? Ask me at ymarsh@marshwealth.com.
The information contained herein is general in nature and offered only for educational purposes. No investment decisions should be based upon this content. This information is not a substitute for engaging MWM for a personal consultation whereby all of your financial circumstances, risk tolerance and investment objectives can be considered.
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