We are rapidly approaching the end of the year, which means cooler weather, holiday cheer, and everyone’s favorite topic: required minimum distributions!
Thrilling, I know, but I find it to be. If you have no interest in learning about something that the government may force you to do with your money, don’t read any further. If interested, continue because recent updates came out a few weeks ago.
In December 2022, Congress passed the SECURE Act 2.0, an update to the original SECURE Act passed in December 2019. One of the key points addressed in this 400-page document was the IRS raising the age you must start taking a required minimum distribution (RMD) from qualified retirement accounts (non-inherited) to 73 beginning in 2023 and 75 starting in 2033. This is an increase from the previous age of 72, giving account holders of qualified retirement accounts one more year before they have to withdraw from their account, potentially saving them in taxes.
The SECURE Act legislation also eliminated the “stretch” IRA for most non-spouse beneficiaries. The result is that many beneficiaries can no longer “stretch” withdrawals over their lifetime but instead must follow a new 10-year rule for depleting the account. Individual beneficiaries who are not eligible designated beneficiaries (EDBs) must follow this 10-year payment rule. Who is an EDB? Who is not an EDB? If you are the surviving spouse of the IRA owner, a minor child of the account owner, disabled, chronically ill, or not more than ten years younger than the account owner, you are a designated beneficiary. If you don’t fit these criteria, consider yourself a non-eligible designated beneficiary. As a non-eligible designated beneficiary, you must not only abide by the 10-year rule, but you may also be required to take annual distributions.
Beginning in 2025, if a non-eligible designated beneficiary inherits a retirement account from someone currently taking RMDs, the beneficiary must now take annual distributions from their inherited retirement account and ensure they deplete the entire account within ten years. This is an essential change because the only explicit instruction from the IRS previously was that the account needed to be depleted within ten years. It is uncertain whether these annual inherited IRA RMDs will be calculated by the brokerage house custodians like Fidelity, Charles Schwab, Vanguard, or others, so I encourage you to talk with a fee-only financial advisor if you think this may impact you.
Conversely, suppose the original account holder was not of age to take RMDs yet. In that case, no annual distributions are required for these beneficiaries, but the beneficiary must still deplete the account within ten years. Sometimes, I’m asked, “What can I do with my RMD?” The answer is that it’s up to you. The IRS wants the money to leave the retirement account, and they don’t care what happens afterward. You can transfer the funds to your bank account, reinvest it in a standard investment account, or give it away, among many other things.
The IRS provided other updates in this final regulation issued in July of 2024, which we won’t get into right now. Questions such as “What if you inherit an inherited IRA from someone else?”, “What if your spouse leaves you their IRA?” and “How can you plan ahead to help minimize taxes on future RMDs you’ll have to take?” are just some of the many layers of this topic. I encourage you to talk with a fee-only financial advisor to learn how to best plan for your situation.
Sources:
IRS Retirement plan and IRA required minimum distributions FAQs
