CONTRIBUTORS
Bill Cass, CFP®, CPWA®
Director of Wealth Planning,
Franklin Templeton
Many beneficiaries with inherited retirement accounts or IRAs may need to act on their accounts before the end of the year.
As part of the 10-year distribution rule of the SECURE law, certain beneficiaries of inherited retirement accounts and IRAs must begin taking (at least) a minimum distribution in 2025. This applies to most non-spouse beneficiaries who inherited an account after 2019.
Clarity on the 10-year rule
After several years of uncertainty, the IRS provided clarity in 2024 on how distribution rules apply on inherited retirement accounts for those subject to the 10-year rule. The regulations require that annual, minimum distributions be made on inherited accounts where the original owner passed away after reaching their required beginning date (RBD). Since the majority of IRA owners will pass away later in life when required minimum distributions apply, many beneficiaries will be subject to this annual distribution rule.
In addition, the heir must fully distribute the inherited account within 10 years after the death of the account owner. In the case where the account owner dies prior to reaching the RBD, there is no annual distribution requirement. The inherited account only needs to be fully distributed by the end of the 10-year period. Spouses and other heirs are exempted from the 10-year rule and can stretch distributions based on their remaining life expectancy.1
Annual distributions must begin in 2025
While the IRS deliberated on the proposed regulations, relief from the annual distribution requirement applied for years 2021 through 2024. That effectively meant that those heirs did not have to take required annual distributions for those years under the 10-year rule. However, beginning in 2025, the annual distribution requirement must be followed for those inheriting an IRA where the original owner passed away after reaching their RBD. The annual distribution is based on the beneficiary’s remaining life expectancy applying a factor from the IRS single life expectancy table. See links to the tables at “Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).”
Once determined, heirs can use that factor to calculate the appropriate distribution based on the value of the account at the end of the previous year. This is the only time the beneficiary consults the IRS table. For each subsequent year, the life expectancy figure is reduced by one.
Planning considerations
Heirs subject to the 10-year rule will want to carefully consider how to distribute inherited (traditional) retirement accounts based on several factors, including their personal tax situation. For some, that may entail equalizing distributions over the 10-year period to spread out the taxes that are due. Others may find a benefit from taking a larger share during a few specific years. For example, someone retiring in the middle of the 10-year period may want to take larger distributions after retiring if their income is lower. Depending on the age of the beneficiary, there may be other considerations when taking distributions, such as income limits impacting taxes on Social Security benefits or the amount of Medicare premiums. Determining the distribution strategy can be complex It’s important to consult with an advisor on the most beneficial strategy based on individual circumstances. For more information on managing inherited retirement accounts see our education piece “Distribution planning under the SECURE Act.”
Endnote
- Note: The required beginning date is generally April 1 of the year following the calendar year in which the account owner reaches age 73. An exception to the 10-year distribution rule applies to eligible designated beneficiaries (EDBs). These types of beneficiaries include spouses, individuals with disabilities or those who are chronically ill, beneficiaries not more than 10 years younger than the account owner, or minor children of the account owner (up to age 21 upon which the 10-year rule applies). These EDBs have the option to take distributions gradually each year based on their remaining life expectancy.
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