Final regulations issued on controversial 10-year rule for Inherited IRAs

At a glance: 

• The main takeaway: The IRS finalized T.D. 1001 regulations, largely maintaining the proposed 10-year distribution rule for inherited IRAs introduced by the SECURE Act.
• Impact on you: The final regulations mark a significant shift for inherited IRAs and retirement planning, driven by the SECURE Act. It’s crucial for beneficiaries to understand and adapt to these changes.
• Next steps: Aprio’s Tax advisors can guide you through the complexities of estate tax before making decisions on inherited IRAs and retirement plans.

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Full story

The IRS issued long-awaited final T.D. 10001 regulations on July 18, 2024, largely maintaining the proposed 10-year distribution rule for the inherited IRAs. While the final regulations generally follow the proposed regulations, =, the rules are also applicable for required minimum distributions (RMDs) from qualified plans; Sec. 403(b) annuity contracts, custodial accounts, and retirement income accounts; individual retirement accounts and annuities (IRAs); and certain eligible deferred compensation plans. The few changes made to the controversial 10-year distribution rules has left many beneficiaries and their advisors disappointed.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019, made several changes to the distribution of inherited IRAs for certain beneficiaries, specifically non-spouse beneficiaries. This new ruling replaces the previous “Stretch IRA” option for most non-spouse beneficiaries. These regulations significantly impact how beneficiaries manage inherited IRAs, emphasizing the importance of understanding the new RMD requirements and the potential tax implications.

Overview of the final regulations:

1. Retention of the 10-Year Rule: The final regulations maintain the controversial 10-year distribution rule, which requires most beneficiaries to fully distribute inherited IRAs within10 years of the original owner’s death. This rule replaces the previous “Stretch IRA” strategy, which allowed beneficiaries to take distributions over their lifetime.
2. Two Groups of Inherited IRAs:
   • Group 1: For IRAs where the original owner had not yet begun taking RMDs, beneficiaries can withdraw funds at any pace as long as the entire balance is distributed by the end of the 10 years.
   • Group 2: For IRAs where the original owner had begun RMDs, beneficiaries must continue taking annual distributions based on the deceased owner’s age until the end of the ninth year, with the full balance distributed by the end of the tenth year. Note that the SECURE 2.0 Act raised the required RMD age to 73 beginning in 2023.
3. RMD Requirements: Starting in 2025, beneficiaries of inherited IRAs must adhere to RMD rules. This includes making annual withdrawals during the 10-year period for certain beneficiaries, which was a significant point of contention in the proposed regulations.
4. Eligible Beneficiaries: Certain individuals, such as surviving spouses, disabled persons, and those not more than ten years younger than the account holder, are exempt from the 10-year rule and can take distributions over their lifetime. Ineligible beneficiaries, like adult children, must follow the 10-year rule.
5. Transitional Relief: The IRS has provided transitional relief for missed RMDs for the years 2023 and 2024, waiving penalties for beneficiaries who failed to take required distributions during this period. The SECURE 2.0 ACT reduced the penalty to a 25% excise tax, which can possibly be reduced further to 10% if the RMD is corrected within two years.
6. Implementation Timeline: The final regulations will take effect for calendar years starting after January 1, 2025. This delay allows beneficiaries more time to adjust to the new rules and seek professional advice if needed.

Inherited IRA impact on estate planning and financial advising

The final regulations necessitate a reassessment of estate plans and retirement strategies. Effective in 2025, with penalty relief offered for missed RMDs between the years 2020 and 2024, financial advisors should consider the following:

• Review eligible accounts for conversion to a ROTH: Thoughts should be given to converting eligible accounts to a ROTH, if appropriate, as ROTH IRAs do not require withdrawals until after the death of the owner and in most cases, withdrawals will be tax free. Keep in mind the five-year taxable distributions and 10-year inherited ROTH IRA rules for your beneficiaries.
• Review Beneficiary Designations: Ensure that beneficiary designations on IRAs align with the new rules and the account holder’s estate planning goals.
• Consider Trust Structures: Evaluate the use of trusts as beneficiaries to provide control over distributions while optimizing tax benefits.
• Plan for Tax Implications: The timing of distributions under the 10-year rule can significantly impact the beneficiary’s tax situation. Strategies to manage and mitigate tax burdens should be a key consideration.
• Communicate Changes: Advisors should proactively communicate these changes to clients and help them understand the implications for their retirement and estate plans.

The bottom line

The IRS final regulations on inherited IRAs mark a significant shift in retirement planning, driven by the SECURE Act. Understanding and adapting to these changes is crucial for beneficiaries, estate planners, and financial advisors. By strategically navigating the new rules, individuals can optimize their inheritance, manage tax liabilities, and ensure their estate planning objectives are met.

Aprio’s Tax advisors can guide you through the complexities of estate tax planning before you begin making decisions on inherited IRAs and retirement plans. Schedule a consultation with your team today.

The complete ruling from the IRS can be found here.

Tax Relief for missed RMD’s can be found here: IRS Notices 2022-53, 2023-54 and 2024-35