FINANCIAL PLANNING TIDBITS: RMDs Restart in 2025 for Post-2020 Inherited IRAs

SUMMARY

Although the IRS has waived 2024 required minimum distributions for non-spousal IRAs inherited after 2020, heirs must take mandatory distributions starting in 2025.

AMBIGUOUS RULES

I have written before about the required minimum distribution (RMD) saga for IRAs inherited after 2020, and now we have the latest—and hopefully last—installment. The SECURE Act, effective in 2020, included a major shift in managing distributions for non-spousal inherited IRAs. Prior to the Act, most non-spousal inherited IRAs required minimum distributions each year, calculated by the IRS based on the beneficiary’s life expectancy and the value of the account at the close of the previous year. These “stretch IRA” provisions remain attached to these accounts, so if you inherited an IRA prior to 2020, this holds true for you.

For most non-spousal IRAs inherited after 2020, however, the SECURE Act created a 10-year rule, which provides that the assets must be distributed by the tenth year after the original owner’s death. The financial world at large interpreted this to mean RMDs no longer applied to any newly inherited IRAs as long as the account was emptied by the end of the tenth year, but the IRS argued otherwise, which launched years’ worth of debates and research that have finally led to an answer.

RMDS EFFECTIVE IN 2025

In July, the IRS published its final guidance: for post-2020 non-spouse inherited IRAs, RMDs are not necessary in 2024. They will, however, be mandatory starting in 2025 for beneficiaries who inherited an IRA after 2020 from a non-spouse who was already subject to RMDs. After 2025 until the tenth year, beneficiaries will be required to take an annual RMD based on their life expectancy. For non-spousal IRAs inherited in or after 2025, the RMD must be taken no later than the year following the year of the original owner’s death.

But what if you inherit an IRA from a non-spouse who wasn’t taking RMDs yet? In this case, while you are still beholden to the 10-year rule, you are not required to take a minimum distribution each year. The reason for this is the “at least as rapidly” (ALAR) provision in original IRA law, meaning that, if an individual was already subject to RMDs when they passed away, their beneficiaries had to take distributions from that account at a commensurate rate. If the original owner of an IRA wasn’t yet in RMD status, their beneficiary is not held to this rule.

REASSESS YOUR TAX STRATEGY

As noted above, there are no taxes or penalties associated with failing to take a distribution for 2024. Prior to the new guidance, some individuals planned to wait until closer to the tenth year to take any withdrawals, anticipating that their other income would be lower at that time. Now that delaying all distributions is no longer an option after 2024, beneficiaries should consult their tax advisor to discuss a new distribution strategy to mitigate the tax burden. Please also reach out to us to review your financial plan, as we’re happy to work with you and your tax professional to determine next steps.

Natalie G. Brown, CFP®
Director of Client Services & Financial Planning
Day Hagan Private Wealth

—Written 8.12.2024.

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