IMPORTANT UPDATES ON FINAL REGULATIONS REGARDING REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
by: Begley Law Group
by Adam Cohen, Esquire
As of July 18, 2024, the IRS has issued final SECURE 2.0 Regulations creating significant updates to the Required Minimum Distribution (RMD) rules for Individual Retirement Accounts (IRAs). These changes, part of broader legislative efforts to adjust retirement savings rules, aim to address longevity risks and ensure that retirement savings are utilized effectively. Here is a concise overview of what you need to know about the new RMD regulations.
Designated Beneficiary Must Take RMDs Annually
One of the most significant changes under the new Regulations is the requirement that Designated Beneficiaries subject to the 10-year rule must take RMDs annually. Previously, under the proposed Regulations, beneficiaries of inherited IRAs could defer taking RMDs until the 10th year after the year following the decedent’s death, provided that all funds were distributed by the end of the 10th year. Inherited IRA beneficiaries were of the belief – and often received professional advice – that they would have flexibility to determine when and how much to distribute from the IRA during the post-death 10-year period. Some people on the verge of retirement would delay taking RMDs from inherited accounts in the hopes of being in a lower tax bracket in retirement. However, the IRS, citing Congressional intent, determined that there was no basis in the law to allow Designated Beneficiaries to delay taking RMDs, if RMDs were required to have been taken by the decedent during life. If the IRA owner was required to take annual RMDs, the Designated Beneficiary is required to take annual distributions.
For Designated Beneficiaries who inherited IRAs after SECURE 2.0 in 2020, but who failed to take the RMDs (likely hoping to defer until the 10th year), the IRS did issue some provisional relief. While a 25% excise tax would otherwise be levied against untaken RMDs since 2020, the IRS will dismiss this penalty if the proper RMD is taken within two years of the missed RMD. The IRS further extended relief noting that these penalties would not begin to apply until missed RMDs beginning December 31, 2024. Practically speaking, it does not appear that missed RMDs will need to be taken, provided that proper RMDs begin in 2025, and that the 10-year rule is otherwise followed. This provisional relief will not extend the time under the 10-year rule. For example, for a decedent who died in 2020, where RMDs have not yet been taken by the Designated Beneficiary, the account must still be fully withdrawn before 2031.
Spouse as Owner of Inherited IRAs
Surviving spouses of deceased IRA owners were in a special position in that they could rollover the inherited IRAs into their own name, giving them greater control over the asset. The proposed Regulations put a time limit on this rollover ability. The final Regulations removed this timeframe and allow the surviving spouse to make this rollover election at any time. To effectuate this rollover, if done at a later date, the spouse will need to claim all untaken RMDs due up until the point of the rollover. Otherwise, surviving spouses of deceased plan participants are given significant flexibility.
Guidance for IRAs Left to Trusts
One significant change the SECURE Acts brought was allowing for an “Applicable Multi-Beneficiary Trust” (AMBT) to be a named beneficiary. The AMBT rules allowed one trust to be named as a beneficiary, with the beneficiary statuses of the respective beneficiaries of each sub-trust to be used in determining RMD payout requirements. The new Regulations confirmed that so long as the terms of the trust require that the retirement account is to be divided immediately upon the death of the owner, and split into separate trusts for each beneficiary, this multi-faceted approach can be followed. This was not allowed prior to the SECURE Act.
The confirmed viability of the AMBT is of particular import when considering disabled or chronically ill beneficiaries. In these cases, the sub-trusts created for the disabled or chronically ill beneficiary can use such beneficiary’s Eligible Designated Beneficiary status in determining RMDs, without regard to the status of any other beneficiary of any other sub-trust. This should allow favorable tax treatment for the disabled or chronically ill beneficiary, as well as easier and more efficient planning for clients and practitioners. IRAs can be safely left to one AMBT; multiple separate trusts need not be drafted.
Final Thoughts
While not as lenient as some would have hoped, the new final SECURE 2.0 Regulations provide planners and their clients clear guidance on what can and cannot be done with retirement accounts after the death of the plan participant. The Regulations present a lot of options for the plan participant, often relating to whether the beneficiaries are spouses, children, trusts, or other individuals. There is not a one size fits all solution. Because of this, people who hold assets in retirement accounts should make sure their long-term planning is done with professional guidance.