Final Regulations for Required Minimum Distributions

In July, the IRS issued the long awaited final regulations on required minimum distributions (RMDs) from retirement accounts.  The regulations became effective on September 17, 2024. The final regulations incorporate rules from both Secure 1.0 and Secure 2.0, answering questions including whether designated beneficiaries must take RMDs on an annual basis.

The SECURE Act eliminated the stretch IRA for non-spouse beneficiaries and required retirement accounts to be distributed within ten years.  Whether or not RMDs would be required during this 10-year period was unclear. In response, the IRS issued proposed regulations in 2022, stating beneficiaries must continue taking RMDs if the original account owner began taking RMDs prior to death. This applies to all beneficiaries, not just those subject to the 10-year rule.  

Due to the confusing language in the SECURE Act, the IRS waived the excise tax for those that inherited an account in 2020 or later and did not take RMDs in years 2021 through 2024.  The final rule states that beneficiaries must begin taking RMDs in 2025, and those subject to the 10-year rule must distribute the entire account within 10 years.

The final regulations also clarify the age factor. If the decedent started taking RMDs from their account prior to death, non-spouse beneficiaries must take RMDs over their single life expectancy or the decedent’s, whichever is longer. RMDs must start beginning the year after death and continue annually until the 10^th year when the account must be fully distributed. A spouse inheriting an IRA or other qualified account is subject to this same rule unless they elect to treat the IRA as their own or make a spousal election.

Spousal Election to Calculate RMDs

The spousal election provides the surviving spouse with the option to use the Uniform Lifetime Table in calculating RMDs, vs using the Single Life Expectancy table, without needing to roll the account into their own name to do so.

The final rule states the Spousal Election will apply automatically if:

1. The employee dies before their required beginning date
2. The employee’s surviving spouse is the sole beneficiary and
3. The spouse is subject to the life expectancy rule. The date in which distributions are required to begin will not be earlier than the date in which the employee would have attained the applicable age.

This means that the first RMD can be delayed until the original account owner would have started taking RMDs, and the RMD can be based on the surviving spouse’s age.  This method is favorable if the surviving spouse is younger.

Spouse Beneficiary Missed RMDs

A spouse beneficiary may elect to treat an IRA as their own. However, if they fail to do so, in cases where an IRA owner dies before their required beginning date and a spouse beneficiary delays the election to treat the IRA as their own, they may be subject to taking missed RMDs.

For example, an IRA account owner dies this year at age 70, before RMDs begin. Their spouse beneficiary initially elects the 10-year rule. However, 8 years later, prior to year 10 elects to treat the IRA as their own. If the spouse beneficiary is of RMD age or past their own required beginning date, they must now take all missed RMDs before they can elect to treat the remainder of the IRA as their own.   

Planning Considerations

Non-Spouse beneficiaries that must take RMDs may want to consider taking roughly equal annual distributions, vs. distributing the account balance in a final lump sum in year 10. From a tax perspective, this will be more favorable since distributions are taxed at ordinary income rates.  Balances distributed in a lump sum in year 10 will likely fall into higher tax brackets.

Even if RMDs are not required (because the decedent had not yet reached RMD age) a withdrawal schedule should still be taken into consideration for non-spouse beneficiaries.  

Spouse beneficiaries have the most options to consider.  They may treat the account as their own, rollover to their own IRA, or leave the account as inherited decide whether to use the Spousal Election.  Each of these options should be reviewed with an advisor to determine which option minimizes RMDs, and meets the income needs of the surviving spouse.