The IRS issued final and proposed regulations focused on required minimum distribution (RMD) rules. The final regulations reflect changes made by the SECURE Act and the SECURE 2.0 Act, apply for distribution calendar years beginning on or after January 1, 2025, and update the rules for RMDs from qualified plans, Sec. 403b annuity contracts, custodial accounts, retirement income accounts, individual retirement accounts (IRAs), annuities and certain eligible deferred compensation plans. Simultaneously, the IRS also issued proposed regulations to address additional RMD issues under the SECURE 2.0 Act.
Below is a summary of updates:
- Taxpayers are required to withdraw funds from their retirement account each year after reaching age 73 (increasing to age 75 in 2033). That amount is referred to as an RMD. However, for inherited retirement accounts, the rules are a bit different. Under the SECURE Act, a beneficiary of an inherited retirement account can withdraw the money as a lump sum or over ten years.
- The final regulations differentiate between instances in which the original owner began taking RMDs prior to their death and instances whereby they passed away before starting their RMDs. They also differentiate between eligible and ineligible designated beneficiaries.
- Eligible beneficiaries are exempt from the 10-year RMD rule. Eligible beneficiaries are surviving spouses, children of the account holder under age 21, disabled or chronically ill persons, and persons who aren’t more than ten years younger than the account holder.
- If the original owner was taking RMDs before their death, eligible beneficiaries could elect to take them consistent with the longer of their life expectancy or that of the participant. If the original owner had not yet begun taking RMDs, eligible beneficiaries can choose to take them consistent with their life expectancy or elect the 10-year rule.
- For those eligible beneficiaries under age 21, their 10-year clock doesn’t start until they turn 21. At age 21, the beneficiary will then have to take RMDs every year consistent with their life expectancy and must zero out the account by the end of ten years.
- The 10-year rule is mandatory for ineligible beneficiaries. Commonly, this would be adult children or grandchildren of the account owner.
- The final regulations confirm the rule that requires continued annual distributions to a designated beneficiary under the 10-year rule. What this means is that if the original owner dies after beginning to take RMDs, the beneficiary must continue to take annual distributions until the end of the 10-year period, when full distribution is required.
- The final regulations also retain the see-through trust concept. To be a see-through trust, the trust must meet certain criteria including being valid under state law, being irrevocable at death, having beneficiaries who are identifiable and meeting the documentation requirements.
- The proposed regulations clarify that age 73 is the applicable age for employees born in 1959 (the SECURE 2.0 Act was unclear as to whether the applicable age for employees born in 1959 was age 73 or 75).
We hope these updates are helpful to you. If you have additional questions, please reach out to your Creative Planning wealth manager.
