Final SECURE Act RMD Regs Released

by Prof. Robert Bloink and Prof. William H. Byrnes

On July 19, the IRS released final regulations on post-SECURE Act required minimum distribution (RMD) rules. These final rules will have a significant impact, both for taxpayers who inherit retirement accounts and those who own them. While the final regulations track proposed regulations released in 2022 closely, they do contain important changes and clarifications. Some of the provisions limit taxpayer options while others offer added flexibility. Most of the regulations apply to both IRAs and company-sponsored retirement plans. While many provisions don’t become effective until 2025, clients should start planning now—both to ensure compliance with less taxpayer-friendly provisions and to take advantage of new flexibility.

RMDs and Inherited Retirement Accounts

As brief background, post-SECURE act, retirement account beneficiaries who do not qualify as eligible designated beneficiaries must now empty an inherited retirement account (and pay the associated taxes) within ten years of the original owner’s death. Eligible designated beneficiaries include surviving spouses, the owner’s children who are not yet 21 years old, disabled or chronically ill individuals and individuals who are not more than 10 years younger than the account owner.

Under regulations proposed in 2022, the IRS surprised many by ruling that annual RMDs for inherited accounts will be required if the original owner had already reached their required beginning date (RBD) and thus had begun their own RMDs. The final regulations confirmed that beneficiaries subject to the ten-year rule must take annual RMDs if the original account owner had reached their RBD prior to death.

Beneficiaries who must take annual RMDs under the ten-year rule include (1) designated beneficiaries who inherit from someone who had passed their RBD prior to death and (2) successor beneficiaries of an eligible designated beneficiary who had been using the life expectancy rule prior to their own death.

The rationale for the annual ten-year RMD requirement is that the law requires account beneficiaries to empty the inherited account “as least as rapidly” as under the distribution method being used by the original account owner as of their date of death.

The final rules are effective beginning in 2025, alleviating concerns about retroactive applicability. The IRS will not impose penalties for taxpayers who skipped RMDs pursuant to the IRS’ penalty relief in 2021024. However, the IRS did not extend the original ten-year period. In other words, beneficiaries who skipped RMDs pursuant to IRS relief must still empty the account within their original ten-year window.

As was the case with the 2022 proposed regulations, the newly finalized regulations provide that a retirement account owner is treated as having no “eligible designated beneficiary” if the owner has multiple designated beneficiaries and one of those beneficiaries is not an eligible designated beneficiary.

However, if any of the individual’s designated beneficiaries is an eligible designated beneficiary because the beneficiary is the child of the individual who had not reached age 21 at the time of the individual’s death, then the individual is treated as having an eligible designated beneficiary even if the individual has other designated beneficiaries who are not eligible designated beneficiaries.

Relief for Roth 401(k) Owners

While Roth IRAs have never been subject to minimum distribution requirements, prior to the SECURE Act, owners of Roth 401(k)s and 403(b) accounts were required to take RMDs. Starting in 2024, RMDs from Roth 401(k)s are no longer required.

While Roth distributions are not taxable on distribution, the new rule gives taxpayers the option of allowing the funds to grow tax-deferred indefinitely.

Clarification for Taxpayers Born in 1959

The SECURE Act 2.0 increased the required beginning date from age 72 to age 73. The age will once again increase to age 75 in 2032. However, because of the way the law was drafted, it appeared that taxpayers born in 1959 had an RBD of both 73 and 75.

While the final regulations did not correct this mistake, the IRS simultaneously released proposed regulations and clarified that for taxpayers born in 1959, the RBD is 73.

Relief for Older IRA Beneficiaries

Post-SECURE act, an individual qualifies as an eligible designated beneficiary if they are not more than ten years younger than the original account owner. These beneficiaries are permitted to take distributions based on their own life expectancy and are not limited by the ten-year rule.

However, based on the “at least as rapidly” rule discussed above, the 2022 proposed regulations required a beneficiary to fully empty the account when the beneficiary’s life expectancy ended (regardless of whether they are still living).

While the rule rarely mattered much if the beneficiary was younger, it penalized older beneficiaries. Under the final regulations, these eligible designated beneficiaries can take distributions over their own life expectancy or the original owner’s life expectancy, whichever is longer. These calculations are based on the IRS single life expectancy table.

Conclusion

The final RMD regulations are complex and detailed. Individuals should carefully evaluate their circumstances with the assistance of qualified tax counsel when evaluating their RMD requirements and options.