As the 2024 tax year comes to a close, for clients who haven’t already, it’s time to begin evaluating changes to the tax code that will apply beginning in 2025.
One of the most broadly applicable adjustments involves how inherited individual retirement account beneficiaries satisfy their required minimum distribution obligations after the death of the original account owner. Since the Secure Act became law, the Internal Revenue Service has repeatedly issued relief for taxpayers around the new RMD rules. Now that four years have passed and the regulations have been finalized, the IRS has been clear that additional relief will not be forthcoming for 2025 and beyond.
At this point, it’s critical that clients understand their RMD obligations to avoid running afoul of IRS rules starting in 2025. Even though distributions may not be required for 2024, some clients should consider taking funds out sooner if that can help avoid a larger tax hit down the road.
RMDs for Inherited IRA Beneficiaries: Background
Post-Secure Act, beneficiaries who inherit retirement accounts must empty those accounts within 10 years of the original account owner's death unless the beneficiary qualifies as an eligible designated beneficiary. Those beneficiaries include spouses, minor children, disabled individuals, chronically ill individuals and individuals who are not more than 10 years younger than the original owner.
Under regulations proposed in 2022, the IRS interpreted the rule to require annual RMDs for non-eligible designated beneficiaries during years one through nine of the 10-year distribution period if the original account owner was already subject to the RMD rules at the date of death. The IRS maintained this rule when it finalized the regulations earlier in 2024, reasoning that the beneficiary must take distributions “at least as rapidly” as under the distribution method being used by the original account owner as of the date of death.
