I read and interpret these boring documents so you don’t have to.

On April 16 the IRS released Notice 2024-35 providing updated guidance on the “10 -year rule” that outlines how Required Minimum Distributions (RMD) must be taken from inherited IRA/401k/403b/etc. However, this year’s notice did state that final regulation rulings would be coming for RMDs beginning on or after January 1, 2025.

Purpose of These Updates

This need for guidance can be traced back to the 2019 enactment of the SECURE Act.  While this act had many changes, one of the more impactful ones was the removal of “Stretch IRAs” and the elongated withdrawal periods that inheritors could take.

Prior to SECURE, any beneficiary of a retirement account could ‘stretch’ the required minimum distributions across their lifetime (according to an IRS table).  For younger heirs, this means they could take extremely small distributions while the account stayed invested and could continue to compound tax deferred.  When this heir would pass away they could even pass the IRA on and continue this stretch.

In order to stop this extended tax deferral, the SECURE Act limited who would be able to use this stretch provision.  In my best attempt to humanize some of this legalese verbiage it can be summarized as such;

IRA owners who died after January 1, 2020, only specific beneficiaries (Eligible Designated Beneficiaries is the term they use) can stretch across their lifetime.  The rest need to take the entire balance within 10 years of death.  The specific beneficiaries who can stretch are;

• Surviving Spouses (spouses have additional benefits for a separate conversation)

• Children under 18

• Individuals with Disabilities

• Chronically Ill heirs

• Heirs who are less than 10 years younger than the deceased

Confusion Always

However, in February of 2022, the IRS decided to make things more complicated than they already were.  This is so unlike them!

Their proposed changes would state that if the deceased had already begun their Required Minimum Distributions while living, the inheritor would be required to, at a minimum, take that RMD for years 1-9 then the remainder of the whole account in year 10.  This can make tax planning very difficult for many beneficiaries as many people inherit these accounts in some of their highest earning years and any additional income can make tax bills hard to plan for.  On top of this, the confusion puts them at risk of needing to pay a penalty if they did this math wrong.

Immediately after this proposed change went public, there was a slurry of confusion and feedback from tax filers and advisors.  Just 6 months later the IRS announced waiving of enforcement of those that missed the RMD for 2021 and 2022.  This waiver indicated that they would issue final regulation for the 2023 tax year but, you guessed it, 2023 rolled around and they pushed it back another year, instead issuing an additional waiver.  Now we are in 2024 and have again received this waiver.  As I mentioned earlier, this notice does say there will be final regulation issued by the end of the year.  I am inclined to believe them this time as the Tax Cuts and Jobs Act (2017) is set to sunset at the end of 2025 and they will want final regulation before this occurs.

Delaying Might Not Always be Best

In summary, this continued delay via IRS waivers means that beneficiaries who inherited retirement accounts in 2020 and beyond will not be required to take minimum distributions until 2025 (if at all).  Still, it might make sense for some inheritors to take distributions now and split up the tax hit over 10 years versus all at once in year 10.  If TCJA sunsets in 2026, top end tax rates will go up several % points.  It also may keep you in a lower bracket instead of bumping into this top bracket a decade from now.

The other side of the coin is that some inheritors might be 5-10 years out from their own retirement and holding off will allow them to take these distributions after their income is low.  For these inheritors it is a positive to be able to push this off.

As always, we will continue to keep you updated as we monitor IRS guidance across all topics.