New IRS Regulations on the “10-Year Rule” for Inherited IRAs
The IRS has published new regulations impacting taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. These regulations, which take effect in 2025, mandate that many beneficiaries must take annual RMDs during the 10-year period following the original owner’s death.
The SECURE Act and the End of Stretch IRAs
The roots of these new regulations can be traced back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation brought significant changes to retirement planning, one of which was the elimination of the so-called “stretch IRAs.”
Changes Under the SECURE Act
Before the SECURE Act, beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. This provision allowed younger heirs to take smaller distributions over many decades, thereby deferring taxes while allowing the accounts to grow. These heirs could also pass the IRAs on to subsequent generations, further deferring taxes.
With the elimination of stretch IRAs, the SECURE Act requires most non-spouse beneficiaries to fully distribute inherited IRA assets within 10 years of the original owner’s death. This change aims to accelerate the tax collection on these inherited accounts, impacting estate planning and tax strategies for beneficiaries.
Implications of the New Regulations
The new IRS regulations clarifying the “10-year rule” build on the SECURE Act’s framework. By requiring annual RMDs within the 10-year period, beneficiaries are now faced with a more structured distribution schedule. This can affect financial planning decisions, as beneficiaries will need to plan for potentially higher taxable income each year.
As these regulations come into effect in 2025, it’s crucial for beneficiaries of inherited IRAs and defined contribution plans to understand the new requirements and adjust their financial strategies accordingly. Consulting with a tax advisor or financial planner can help navigate these changes and optimize the handling of inherited retirement assets.