Final regulations released late Thursday by the Internal Revenue Service and the Treasury Department have shed new light on the 10-year drawdown rule for non-spouse beneficiaries who inherit retirement accounts.
First created by the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, the 10-year rule requires certain beneficiaries who inherit retirement accounts to empty those accounts within a decade of the original account owner's death. Since the legislation's passage, however, stakeholders have expressed confusion about the exact requirements.
Now, regulators have issued their final interpretation of the 10-year rule, confirming that most IRA beneficiaries must continue taking required minimum distributions in each of the 10 years after the account holder's death, emptying the account in that period. Generally exempted from this requirement are spouses, minors and disabled beneficiaries, with some important caveats.
The regulators have also issued a more limited set of additional proposed regulations that aim to clarify other points of confusion with respect to inherited 457 and 403(b) retirement accounts, and as noted in an extended thread published on the social media platform X by the financial planning expert Jeff Levine, advisors have a lot of catching up to do in the days and weeks ahead.
Levine, who is Kitces.com's lead financial planning nerd and Buckingham Wealth Partners' chief planning officer, also emphasized that a series of IRS notices published in the last several years mean the final rules won't actually begin to apply until next year (2025).
"So, to be clear, no RMDs [are required] during the 10-Year Rule from 2021 – 2024," Levine wrote. "Of course, just b/c someone doesn't have to take an RMD this year doesn't mean they shouldn't. … Shame on those who prioritize a lower tax bill this year at the expense of a much higher lifetime tax bill (if, say, future distributions are so big they drive up the rate)."
Below are some additional highlights from Levine's early interpretation of the final 10-year rule.
The No. 1 Question Is Answered
Levine said that the top question he has heard from advisors in the years since the Secure Act's passage — and since some important updates were made via follow-up Secure 2.0 Act legislation in 2022 — is whether an inherited account must be emptied by a noneligible beneficiary "during" the 10-year period or "only by the end of" the decade.
The answer is now clear, Levine wrote, and people must make annual withdrawals during the 10-year period, assuming the person who died was themselves taking RMDs due to their age at death.
Levine said this is a disappointing result for advisors and clients who wanted more freedom in the way they manage the draining of the account, but it's not a total loss. This is because the final regulations stipulate that, if a person giving away a retirement account died "before" their own RMD date, they do have this flexibility.
But, as noted, if RMDs had already started, they must continue based on the new 10-year time horizon. In this sense, RMDs are like pringles chips, Levine said: Once you start you can't stop.
A 'Whacky' but Clarified RMD Regime
Regardless of the specifics, Levine said, all the money must be out of the account within a decade, and he gave the following example to clarify how the process might unfold for a given client.
Assuming a non-eligible beneficiary inherited an IRA in 2021 from a 78-year-old person who had started their own RMDs, this inheritor would not need to take RMDs for 2022, 2023 or 2024— thanks to the IRS notices waiving this requirement. But they will now face annual RMDs from 2025 through 2030, and the account must be empty by 2031.
"Why this madness?" Levine asked. The short answer is that the original Secure Act added the 10-year rule to the Tax Code, but it didn't remove the separate "at least as rapidly" drawdown rule found in 401(a)(9)(B)(i), which also generally applies to deaths after RMDs have begun.
Congress "almost certainly" didn't intend this, according to Levine, but they also didn't "fix" it when they passed the Secure 2.0 Act.
"They easily could have done so. But they didn't. Which in effect was a tacit endorsement of this new whacky regime we have," Levine wrote. "Needless to say, the 'Beneficiary Family Tree' is now insanely complicated."
