Clarifying the Rules Around Required Minimum Distributions (RMDs)
In July 2024, the IRS issued final regulations on law changes introduced by the 2019 SECURE Act and the SECURE 2.0 Act passed three years later, in 2022. We believe these pieces of legislation, and the formal communications that followed, included confusing language and left questions unanswered. The IRS’s final regulations included clarification specific RMDs:1
- Confirmed the RMD age for individuals born in 1959 as 73 (correcting an earlier drafting error that set the age at both 73 and 75)
- Reinforced the requirement for Non-Eligible Designated Beneficiaries (NEDBs) to take annual RMDs under the 10-year rule if the original owner had been subject to RMDs
The 10-year rule states that the entire balance of an inherited retirement account must be emptied by December 31st of the 10th year after the year of the owner's death. The introduction of this rule in 2019 ended the so-called stretch IRA, a strategy that allowed beneficiaries to take RMDs over their own life expectancy.
Considerations for designated beneficiaries
The IRS's final regulations clarified the rules governing RMDs for designated beneficiaries of inherited retirement accounts. These rules distinguish between two types of beneficiaries:
- Designated or Non-Designated
- Eligible or Non-Eligible
Most individuals fall under the Designated Beneficiary category.
Further, each type of beneficiary may have a different distribution requirement subject to the original account owner reaching their Required Beginning Date (RBD). In other words, was the original account owner already obligated to take RMDs at the time they passed away?
Non-Eligible Designated Beneficiaries (NEDBs) are categorized into two key subgroups based on when the original owner passed away:
- NEDBs inheriting from someone who died before their RBD
- NEDBs inheriting from someone who died on or after their RBD
Had the account owner not yet reached their RMD age, a Non-Eligible Designated Beneficiary will only have to follow the 10-year rule. If the RBD had been reached, the NEDB will have to distribute the entirety of the account in 10 years and also take minimum distributions in each year along the way.
The previously issued waiver of the penalty for failure to meet this requirement at any point between 2021-2024 is still in effect with no need to make up for the missed distributions. These clarified rules for RMDs became effective and enforced at the beginning of 2025.
The following “family tree” can help you trace how the final regulations might impact your personal situation:
For illustrative purposes only and is subject to change without notice. Source: kitces.com LLC
Seek individual advice
Whether or not you are subject to a minimum distribution on an inherited account, there may be reasons to withdraw funds, and possibly withdraw even more than the minimum. For example, beneficiaries subject to the 10-year rule are not limited to an RMD and may find it best to spread out distributions from their inherited accounts to avoid a significant spike in income (and resulting tax rate) in the final year. There may also be scenarios in which taking more (or even all) of the distributions sooner rather than later would be most tax efficient.
Individual cases are different and require attentive and proactive planning throughout. The Wealth Advisors at Corient would be happy to discuss your unique situation.
1 https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
ABOUT THE AUTHOR
Josh Larson, CFP
Josh is an Associate Partner, Wealth Advisor based in our Itasca, IL, office. He counsels clients with unique and complex situations requiring advanced planning solutions tailored to optimize the objectives they value most. He earned his degree at Aurora University studying Accounting and Business & Commerce. Josh is a CERTIFIED FINANCIAL PLANNER™ professional.
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4566257 – June 2025
