Staying informed about retirement account rules is crucial for anyone managing inherited accounts. One of the most complex areas for many beneficiaries has been the rules concerning Required Minimum Distributions (RMDs) for inherited IRAs, especially for non-spouse beneficiaries. The IRS has issued new guidance effective in 2025, providing clarity and changes that can significantly impact distribution strategies. Understanding these updates is essential to avoid penalties and ensure compliance.
The SECURE Act of 2019 & 10-Year Rule
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 fundamentally changed how non-spouse beneficiaries handle inherited IRAs by introducing the 10-Year Rule. Under this rule, most beneficiaries are required to withdraw the full balance of the inherited IRA within ten years. Initially, many assumed these distributions could be deferred until the end of the ten-year period. However, the IRS later clarified that if the original account holder had initiated RMDs, beneficiaries also needed to make annual withdrawals.
This led to considerable confusion and uncertainty. The updates issued for 2025 aim to address these inconsistencies, affecting the way future distributions are managed.
Relief for Missed RMDs (2021-2024)
In response to the challenges faced by many beneficiaries, IRS Notice 2024-35 provided temporary relief for those who did not take RMDs from 2021 through 2024. This relief applies specifically to IRAs inherited from account holders who had already commenced RMDs at the time of inheritance. With the issuance of the latest IRS guidance, this period of relief offers beneficiaries a chance to rectify past discrepancies without incurring penalties.
New RMD Rule for 2025
Beginning January 1, 2025, the option to receive waivers for missed RMDs will no longer be available. This change underscores the importance of adhering to annual withdrawal requirements. Beneficiaries must be proactive in planning their withdrawals to ensure compliance with the latest rules and to prevent any avoidable penalties.
Who Is Exempt from the SECURE Act Withdrawal Rule?
Not everyone is subject to the 10-year distribution rule introduced by the SECURE Act. Exempt groups include:
- Surviving spouses
- Minor children (under the age of 21)
- Individuals with disabilities or a chronic illness
- Non-designated beneficiaries, such as charities or estates
- Accounts inherited before 2020
The urgency of understanding these changes as we move into 2025 cannot be overstated. Beneficiaries should review their withdrawal plans and consult a financial advisor to ensure they are fully compliant with these updates.
