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IRS Issues Final Ruling On Inherited IRA RMDs

IRS Issues Final Ruling On Inherited IRA RMDs

On July 18, 2024, the IRS issued its final ruling on required minimum distributions from qualified plans, including inherited IRAs and qualified annuities. When Congress enacted the SECURE Act in December 2019, the law introduced significant changes to the tax treatment of inherited retirement accounts. One of the most impactful changes was eliminating the "stretch" option for most non-spouse beneficiaries. This new final ruling now requires annual distributions in addition to the 10-Year Rule for most non-spouse beneficiaries of qualified deferred compensation plans. The 10-Year Rule requires you to fully distribute inherited retirement accounts by the end of the 10th year following the original account owner's death, but this new final ruling now requires annual distributions in addition to the 10-Year Rule. 

After releasing the initial proposed regulations in 2022, the Treasury and IRS considered feedback that beneficiaries shouldn't have to take annual distributions as long as the account balance is fully distributed within ten years of the individual's death, as mandated by the SECURE Act. However, they ultimately decided that the final regulations would maintain the requirements of the proposed regulations for non-designated beneficiaries subject to the 10-Year Rule also need to take annual Required Minimum Distributions (RMDs) if the original account owner had been subject to RMDs before their death. While beneficiaries who missed RMDs between 2021 and 2024 will not face penalties or be required to make up missed distributions, it's important to note that RMDs will be required starting in 2025. If you are subject to RMDs and fail to withdraw the full amount by the end of 2025, the amount not withdrawn will be subject to a 25% excise tax. So if the RMD is $20,000 next year, and you don't take that money out, you will owe a $5,000 penalty. 

If you inherited an IRA in 2020 or later and have not yet started taking your RMDs, you should speak with your financial advisor about creating a distribution plan. If you don't have a financial advisor and the value of your inherited IRA is over $500,000, you might benefit from specialized tax planning offered by the Hurlow Wealth Management Group. CLICK HERE to schedule a time to discuss creating a personalized strategy to help you navigate these new regulations and ensure your retirement strategy is on track.

Sources: 
irs.gov/newsroom/treasury-irs-issue-updated-guidance-on-required-minimum-distributions-from-iras-other-retirement-plans-generally-retains-proposed-rules
kitces.com/blog/secure-act-2-0-irs-regulations-rmd-required-minimum-distributions-10-year-rule-eligible-designated-beneficiary-see-through-conduit-trust

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