No More Waivers: IRA Beneficiaries Must Take RMDs in 2025

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.

Since the proposed regulations were released, the IRS provided relief for beneficiaries each year by waiving penalties for missed RMDs. Notice 2024-35 once again waived RMD penalties in 2024 for beneficiaries of accounts when the original owners died after their required beginning date and the beneficiary inherited the account in 2020, 2021, 2022 or 2023. In previous notices, the IRS excused these RMDs for 2021, 2022 and 2023 for account owners who died in 2020, but after their required beginning date, as well as for 2022 and 2023 for those who died in 2021, and in 2023 for those who died in 2022.

How to Calculate RMDs for 2025

Many clients elected to take advantage of the IRS penalty waiver and skipped taking RMDs from inherited IRAs over the past few years. It’s important to understand how their 2025 RMDs will now be calculated.

Assume that a client inherited an IRA in 2020 and has yet to take a distribution. Assume further that the original account owners died after their required beginning date, so that the client is subject to the 10-year and “at least as rapidly” rules.

For 2025, clients will begin by determining their life expectancy factor for the 2021 tax year, the first year that RMDs would have been required absent the IRS penalty waiver. The client then subtracts 1 for each subsequent year to find the relevant life expectancy.

So, if the client’s life expectancy, from the IRS Single Life Table, was 45.7 in 2021, the client’s 2025 RMD will be based upon a factor of 41.7. Further, the client should be advised that the account must be fully emptied by the end of year 10.

Importantly, clients who did not take RMDs over the past few years may end up with a larger-than-expected distribution in year 10. Of course, that equates to a more significant tax liability. Clients may wish to take larger-than-required distributions starting in 2025 — or even before year-end in 2024 — to spread out the tax liability and potentially avoid jumping into a higher tax bracket.