IRS Finalizes RMD Regulations

The IRS has finalized regulations affecting required minimum distributions (RMDs) for inherited individual retirement accounts (IRAs). RMDs are the minimum amount you must withdraw from your retirement account each year.

Here's what you need to know about the requirements:

• Required Beginning Date:
  Traditional IRAs and pre-tax dollars in an employer retirement plan generally require that RMDs begin at age 73 (if the participant was born between January 1, 1951, and January 1, 1952) or age 75 (if the participant was born on or after January 1, 1953). As for employer retirement plans, some may allow the required beginning date (RBD) to be delayed until after retirement.
  
  
• Option to Defer:
  In the year when you reach age 73 or 75 as outlined above, you may elect to defer the start of your RMD into the following year, assuming withdrawal begins before April 1 of the following year. You may also elect to take it in the year in which you turn 73 or 75 to avoid taking two distributions within the same year. In each consecutive year following the required beginning date, the RMD must be taken before December 31. Therefore, if the first RMD is deferred into the following year, it would require two distributions within the same calendar year. This could potentially result in a higher-than-average tax liability for that year.
   
• Distributions for IRAs Inherited After 2019:
  
  
  • Ten-Year Rule:
    Excluding exceptions for certain Eligible Designated Beneficiaries, those who inherit an IRA from a decedent who passed away after 2019 will be required to completely deplete the IRA within ten years following the original owner's death.
    
    
  • Required Minimum Distributions:
    If the original IRA owner had already attained the age of their required beginning date (RBD), and if the beneficiary is not excluded from the requirement based on Eligible Designated Beneficiary status, then they will be needed to initiate minimum distributions beginning in 2025, continuing annually through the ten years to depletion of the IRA.
    
    
  • Waiver of Excise Tax:
    Due to a lack of clarity in the SECURE Act language, the IRS has waived the excise tax that would have applied to distributions not taken from 2021 through 2024. Although the excise tax for this period was waived, the required time horizon for depletion remains unchanged. In other words, excluding exceptions, the IRA is still required to be completely depleted within ten years of the date of the original owner's death, regardless of whether distributions were taken from 2021 to 2024.
    
    
• Eligible Designated Beneficiaries:
  For those beneficiaries who are a surviving spouse, a minor child of the participant, disabled or chronically ill, or a beneficiary who is not more than 10 years younger than the participant, they may have options to adhere to the Ten-Year Rule, defer to the original "stretch" rules, or, in the case of a surviving spouse, elect to treat the IRA as their own. The Ten-Year Rule would apply upon a minor beneficiary reaching the age of majority.
  
  
• Roth IRAs: 
  Roth IRAs do not require RMDs. Historically, Roth 401(k) accounts were subject to RMDs, but the SECURE 2.0 Act removed the requirement. Although Roth accounts are not subject to the required minimum distribution rules, inherited Roth IRAs usually are.
  
  
• Year of Death RMD:
  Suppose the original IRA participant had reached the age of their required beginning date but had not taken the RMD in the year of their passing (or had only taken a portion of it). In that case, it is the responsibility of the IRA beneficiaries to ensure that any remaining amount of the RMD is distributed in the year of the IRA owner's death.
  
  
• Other Insights:
  If the original IRA participant had already reached the age of their required beginning date, then the beneficiary must continue to take minimum distributions throughout the ten years. Taking only the minimum amount will likely result in a reasonably large distribution in the tenth year, which could potentially have adverse income tax consequences. It is recommended to consult with a qualified tax professional at the beginning of the distribution period to analyze alternative strategies, such as taking pro-rated annual amounts from the IRA based on the number of years remaining before the IRA is depleted.  

Please consult your tax advisor before taking any actions related to an IRA or employer retirement plan. Our trusted relationship managers are here to guide you through your options. To connect with a First Financial Trust officer near you, contact us here.