3691 / What distribution requirements apply to an inherited IRA where the beneficiary is not the surviving spouse?
Planning Point: Although RMDs for inherited IRA beneficiaries have technically been waived every year since 2020, these beneficiaries may wish to consider taking annual RMDs anyway. Tax rates are currently at historic lows. The IRS has also not indicated whether it will extend the 10-year period, meaning that the beneficiary could face a larger tax bill once the IRS begins enforcing their RMD obligations in 2025.
Distribution requirements for an inherited IRA for a nonspouse beneficiary will depend on whether the IRA owner died before, on or after the required beginning date. The SECURE Act made substantial changes that eliminate the “life expectancy method” and “five-year method,” discussed under the heading below, for most account beneficiaries. Under the new law, most non-spouse account beneficiaries will be required to take distributions over a 10-year period following the original account owner’s death (the 10-year rule).
The law did not change the rules applicable to surviving spouses who inherit retirement accounts. Exceptions also exist for disabled beneficiaries, chronically ill beneficiaries and children who have not reached “the age of majority” (i.e., eligible designated beneficiaries). Proposed regulations provide that, for defined contribution plans, a child reaches the age of majority on their 21st birthday. One exception contained in the proposed regulations would continue to allow plans adopted prior to the effective date of the final regulations to continue to use their own definition of “age of majority.”
A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary. The new 10-year rule also does not apply to an account beneficiary who is not more than 10 years younger than the original account owner. See Q for more on eligible designated beneficiary status.