For Many, RMDs from Inherited IRAs Must Start by Dec. 31, 2025

William Stromsem, J.D., CPA, George Washington School of Business

Rick Allen, CPA-East Texas

After many years of delays that may have lulled recipients of inherited individual retirement accounts (IRAs) and other retirement fund accounts into an expectation of continuing delays, on July 18, 2024, the IRS issued final regulations that will require many beneficiaries to take distributions by the end of this year. Regular IRA distributions generally result in taxable income to the recipient and failure to make required minimum distributions can result in a 25 percent excise tax on amounts that are less than required. Relief from this excise tax is available in certain cases. The IRS will not further waive enforcement of the RMD provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022. This will mean additional taxable income and tax from the required 2025 distributions and, if RMDs are not received, there is a 25 percent penalty on the distribution shortfall.

In general, those who inherited IRA accounts beginning in 2020 (other than spouses or other eligible designated beneficiaries) must withdraw all funds by December 31st of the year including the 10^th anniversary of the account owner’s death. Eligible designated beneficiaries include spouses, the owner’s minor children, a disabled individual, a chronically ill individual, or any individual who is not more than 10 years younger than the IRA owner. Those who inherited before 2020 can generally continue using the prior rules that allowed them to take the RMDs over the beneficiary’s life expectancy.

The new rules for calculating RMDs are complex depending on a variety of factors, such as:

• whether the original owner had already started taking RMDs,
• the age of the beneficiary,
• the relationship of the beneficiary to the decedent,
• whether the owner died before the SECURE Act of 2019,
• whether this is a regular IRA or Roth, etc.
  

Information provided by financial institutions (custodians) may be so complex, hedged and generalized that clients find it difficult to use, prompting them to seek clarification from you. Unless you are an expert in the area, this may take time and effort, and clients may expect you to understand the rules and may be reluctant to pay for your research time. For starters, you might refer the client back to the financial institution, with fund custodians or directors required to provide the RMD amount by Section 1.408-8, Q&A-10 of the Treasury Regulations. However, the IRS does not appear to require IRA custodians to compute RMDs for IRAs inherited after 2019 where the spouse is not the beneficiary due to the complexity of these new rules. If you must get into the weeds, the IRS and some financial institutions have RMD calculators, but they require a lot of information and effort.

For spouse beneficiaries who inherited IRAs, the rules generally follow prior law. For IRAs inherited before 2020, if the death of the account holder occurred prior to starting RMDs, the spouse can take distributions over his/her life expectancy or follow the 5-year rule or can roll the inherited IRA into their own IRA. If the account holder died after beginning RMDs, the spouse can take distributions over the remainder of his/her life expectancy, with no 5-year rule available. For spouse beneficiaries who inherited IRAs after 2019, he/she can delay beginning RMDs until the deceased employee would have reached age 72 and then take the distribution over his/her own life expectancy and can follow the 10-year rule or the spouse can roll the amount into his/her own IRA.

For non-spouse beneficiaries who inherited an IRA before 2020, the beneficiary can take distributions based on his/her own life expectancy or follow the 5-year rule. If distributions had started, the beneficiary could take distributions based on longer of the life of the beneficiary or the decedent’s remaining life expectancy. For non-spouse beneficiaries who inherited an IRA after 2019, eligible designated beneficiary (spouse or minor child, disabled individual, or individual not more than 10 years younger than the decedent) may take distributions over the longer of the beneficiary’s or the decedent’s life expectancy or follow the 10-year rule.

The 5-year rule requires distributions to be completed by the end of the fifth year following the account holder's death. The 10-year rule requires that the entire balance be distributed by the end of the 10^th year following the account holder's death. 

For Roth accounts, distributions of principal and interest are generally tax-free. However, the entire balance must be withdrawn by the end of 10 years according to the SECURE Act. Spouses will follow the rules given above, but non-spouse individual recipients must make RMDs to eliminate the balance by the end of 10 years. If the decedent had been receiving RMDs before death, the beneficiary must receive distributions based on his/her own life expectancy in years 1 through 9 and complete distribution of the entire account balance in year 10. If the decedent had not started receiving distributions, annual RMD distributions may be avoided with a lump-sum amount paid to deplete the account in year 10, thus deferring income and continuing tax-free growth until then. The SECURE Act specified that the account had to be completely distributed by the end of year 10, with no mention of distributions in years 1 through 9  (TXCPA commented to the IRS that RMDs for years 1 through 9 were not provided in the legislation.) Apparently, this final resolution takes a middle ground, requiring completion of RMDs that had already started.

In general, penalties and income tax on IRA distributions can be avoided by older taxpayers (age 70 ½ and older) if charitable gifts are made directly from the inherited IRA to cover the RMD requirements.

For further information, see guidance from the IRS, including Retirement topics - Beneficiary, Required minimum distributions for IRA beneficiaries and IRS Publication 590-B Distributions from Individual Retirement Arrangements.

The 10-Year Rule for Inherited IRAs