New IRS Rules for RMDs You Can’t Ignore
On July 18, 2024, the IRS issued new rules about Required Minimum Distributions (RMDs) that will affect beneficiaries of retirement accounts. These changes are important for anyone involved in planning for retirement or dealing with inherited retirement accounts. These rules define what is expected from beneficiaries and how they should handle the distributions.
Let's explore these new regulations in simple terms.
In addition to confirming the general post-death RMD rules, the comprehensive Final Regulations provide detailed guidance for the following:
Post-Death Distribution Rules for Non-Eligible Designated Beneficiaries
Non-Eligible Designated Beneficiaries must take annual RMDs, starting in 2025.
New rules clarify handling of RMDs when the account owner dies.
Surviving spouses have a new "Hypothetical RMD" rule.
Designated Roth accounts have special rules for Non-Eligible Beneficiaries.
Successor beneficiaries have different RMD requirements.
See-Through Trust beneficiaries are redefined.
Aggregation of annuity and non-annuity assets for RMD calculations is clarified.
The RMD Breakdown
Post-Death Distribution Rules for Non-Eligible Designated Beneficiaries
Since introducing the SECURE Act Proposed Regulations in February 2022, advisors and their clients have been eager to determine if beneficiaries need to take annual minimum distributions during the 10-Year Rule period. The answer is yes, but only if the beneficiary inherits from someone who passed away on or after their required beginning date (RBD).
The IRS further divided Non-Eligible Designated Beneficiaries into two subgroups:
Those inheriting from an individual who died before their RBD.
Those inheriting from an individual who died on or after their RBD.
For the first subgroup (those inheriting from someone who died before their RBD), the rule is simple: they must empty the account by the end of the tenth year after the original owner's death. For the second subgroup (those inheriting from someone who died on or after their RBD), the beneficiaries must follow both the 10-Year Rule and the older Stretch rules. This means that in addition to emptying the account within ten years, they must also take annual RMDs during that time.
Annual RMDs for Non-Eligible Designated Beneficiaries
Under the new regulations, Non-Eligible Designated Beneficiaries must take RMDs every year, beginning in 2025. If these beneficiaries were supposed to take RMDs between 2021 and 2024 but did not, there is no penalty, and they don't have to make up for those missed distributions. This means beneficiaries can start fresh in 2025 without worrying about the past years.
Handling RMDs When the Account Owner Dies
When an account owner passes away, the handling of undistributed RMDs is now more straightforward. The new rules guide beneficiaries on how to manage these distributions, ensuring they are in line with IRS requirements. This helps to reduce confusion and ensure the proper handling of the deceased person's retirement account.
Special Rules for Surviving Spouses
The IRS has introduced a new "Hypothetical RMD" rule for surviving spouses. If a spouse initially chooses the 10-Year Rule for RMDs but later decides to roll over the account or treat it as their own, they have specific rules to follow. This change provides flexibility for surviving spouses, allowing them to make choices that suit their financial needs.
Designated Roth Accounts
For those with Designated Roth accounts, there are specific rules for Non-Eligible Designated Beneficiaries. If an account holder has all their money in a Roth account, beneficiaries are not required to take annual RMDs during the 10-Year Rule period. This means the funds can grow tax-free for a longer time, which can be a significant benefit.
Successor Beneficiaries and See-Through Trusts
Successor beneficiaries have specific requirements based on the original beneficiary's plan. They may need to start a new 10-year distribution period or complete the previous period. Additionally, new definitions clarify which beneficiaries of a See-Through Trust are considered part of the retirement account. These changes make it easier for people to understand their roles and responsibilities.
Calculating RMDs with Annuity and Non-Annuity Assets
The IRS has also clarified how to calculate RMDs when a retirement account includes both annuity and non-annuity assets. Now, these assets can be combined to figure out the total RMD, and payments from an annuity can count towards the total RMD for both types of assets. This simplification can help beneficiaries manage their accounts more effectively.
These new IRS regulations bring more clarity and simplicity to managing retirement accounts, especially after the account owner's death. With these guidelines, planning for the future can be more straightforward and less stressful.
Don't leave your financial future to chance. Ensure you're fully prepared for what lies ahead. Contact us for a consultation and start planning for a secure retirement.
Tip: For more information about required minimum distributions, visit the IRS FAQ website.