What Happens When You Inherit an Already Inherited IRA?
When you are the successor beneficiary of an Inherited IRA the rules are very complex.
When someone passes away and they have a retirement account, if there are non-spouse beneficiaries listed on the account, they will typically rollover the balance in the inherited retirement account to either an Inherited Traditional IRA or Inherited Roth IRA. But what happens when the original beneficiary passes away and there is still a balance remaining in that inherited IRA account? The answer is that a successor beneficiary inherits the account, and then the distribution rules become complex very quickly.
Beneficiary of an Inherited IRA (Successor Beneficiaries)
As a beneficiary of an inherited IRA, it's important to understand that the options available to you for taking distributions for the account will be determined by the distribution options that were available to the original beneficiary of the retirement account that you inherited it from, which vary from beneficiary to beneficiary.
Non-spouse Inherited IRA Rule
The IRS changed the rules for non-spouse beneficiaries back in 2019 with the passing of the Secure Act, which put original non-spouse beneficiaries in two camps: beneficiaries that inherited a retirement account from someone that passed away prior to January 1, 2020, and beneficiaries that inherited retirement accounts some someone that passed January 1, 2020 or later.
We have a whole article dedicated to these new non-spouse beneficiary rules that can be found on our website but for now I will move forward with the cliff notes version.
Stretch Rule vs 10-Year Rule Beneficiaries
As the beneficiary of an inherited IRA, you must be able to answer two questions:
Was the original beneficiary subject to the “RMD stretch rule” or “10-year rule”?
If that beneficiary was required to take an RMD in the year they passed, did they already distribute the full amount?
Original Beneficiary was the Spouse
A common situation is that a child has two parents - the first parent passes away, and the balance in those retirement accounts are then inherited by the surviving spouse and moved into the surviving spouse’s own retirement accounts. A spouse of an original owner of a retirement account has special rules available to them which allow them to roll their deceased spouse’s retirement accounts into their own retirement accounts and treat them as their own. When their children inherited the remaining balance in the retirement accounts from the second to parent, they are considered non spouse beneficiaries and are most likely subject to the new 10-year distribution rule unless they qualify for an exception.
Non-spouse Beneficiary 10-Year Rule
If the original beneficiary of the Inherited IRA received that account from someone that passed away after December 31, 2019 and they are a non-spouse beneficiary, they are most likely subject to the new 10-Year Rule which requires the original beneficiary to fully deplete that retirement within 10 year of the year following the original decedent’s death.
Example: Sue, the original owner of a Traditional IRA passes away in 2022, and her daughter Katie is the sole beneficiary of her IRA. Since Katie is a non-spouse beneficiary, she would be required to fully deplete the IRA by 2032, 10 years following the year after that Sue passed away.
But what happens if Katie, the original beneficiary of that inherited IRA passes away in 2026, and she is only 4 years into the 10-year depletion cycle? In this example, when Katie set up her inherited IRA, she named her two children Scott & Mara as 50/50 beneficiary on her inherited IRA account. Scott and Mara would move their respective 50% balance into their own inherited IRA account but as beneficiaries of an already inherited IRA, the 10-year rule does not reset. Scott & Mara would be bound to the same 10-year depletion date that Katie was subject to so Scott & Mara would have to deplete the Inherited IRA (2 times inherited) by 2032 which was Katie’s original 10-year depletion date.
10-Year Rule: The basic rule is if the original beneficiary of the inherited IRA was subject to the 10-year rule, as the new beneficiary of that existing inherited IRA, you get whatever time is remaining in that original 10-year period to fully deplete that Inherited IRA. It does not matter whether the inherited IRA that you inherited was a Traditional IRA or a Roth IRA, the same rules apply.
Original Beneficiary was a “Stretch Rule” beneficiary or the Spouse
For original non-spouse beneficiaries that inherited the retirement account from an account owner that passed away before January 1st, 2020, they have access to what is called the Stretch Rule. Those non-spouse beneficiaries are allowed to move the original owners balance of the retirement account to their own inherited IRA and they are not required to deplete the account in 10 years.
Instead, those non-spouse beneficiaries are only required to take an annual RMD (required minimum distribution) each year, which are small distributions from the Inherited IRA each year, but they could effectively stretch the existence of that inherited account over their lifetime. But it’s also important to note, that some non-spouse beneficiaries that inherited a retirement account from someone who passes on or after January 1, 2020, may have qualified for a stretch rule exception which are as follows:
Surviving spouse
Person less than 10 years younger than the decedent
Minor children
Disabled person
Chronically ill person
Some See-Through Trusts benefitting someone on this exception list
If the original beneficiary of the inherited IRA was eligible for the stretch rule, and you inherited that inherited IRA from that individual, you would NOT be eligible for the Stretch Rule, you would be subject to the 10-year rule, but you would have a full 10-years after the owner of that inherited IRA passes away to fully deplete the balance in that inherited IRA that you inherited.
When we are talking about beneficiaries of an already inherited IRA, it does not matter whether you were their spouse or non-spouse because the spouse exceptions only apply to the spouse of the original decedent.
Example: John inherited a Traditional IRA from his father who passed away in 2018. John was a non-spouse beneficiary, but since his father passed before 2020, he was eligible for the stretch provision which allowed John to roll over the Traditional IRA to an inherited IRA in his name and he was only required to take annual RMD’s each year but was not required to deplete the account in 10 years. John passes in 2025, his daughter Sarah is the beneficiary of the Inherited IRA, since Sarah inherited the inherited IRA from John who passes after December 31, 2019, Sarah would be required to deplete the balance in John’s inherited IRA by 2035, 10-year following the year after John passes.
RMD of Beneficiaries of Inherited IRAs
Now we have to move on to the second question that beneficiaries of Inherited IRAs need to ask, which is “does the successor beneficiary of an inherited IRA need to take annual RMD’s from the account each year?” The answer is “it depends”.
It’s common for beneficiaries of Inherited IRAs to be subject to both the 10-year rule and be required to take annual required minimum distributions from the account. Whether or not the beneficiary needs to take an RMD will depend on the whether or not the original beneficiary of the account was required to take RMDs. The basic rule is if the current owner of the Inherited IRA was required to take annual RMD’s from the account, you as the beneficiary of the Inherited will be required to continue to take RMD’s from the account. The IRS has a rule that once an owner of an IRA or Inherited IRA has started taking RMDs, they cannot be stopped.
If the answer is “Yes:”, the person that you inherited the Inherited IRA from was already taking RMD’s from the Inherited IRA account, then you as the beneficiary of that inherited IRA would be subject to whatever time is left in the 10-year rule, and you would also be required to take RMDs from the account each year.
Don’t Forget To Take The Decedent’s RMD
RMD’s are usually required to begin the year after an individual passes away which is true of Inherited IRAs but as the beneficiary of an retirement account, where the decedent was required to take an RMD for that year, you have to ask the question: did they satisfy their RMD requirement before they passed away.
If the answer is “yes”, no action is required in the year that they passed away unless they were in year 10 year of the depletion cycle.
If the answer is “no”, then you as the beneficiary of that existing Inherited IRA are required to take the undistributed RMD amount from that inherited IRA in the year that the decedent passed away.
Example: Kelly inherits an Inherited IRA from her mother Linda. Linda originally inherited the IRA from her father when he passed in 2022. At the time that her father passed, he was 80, which made him subject to RMDs. When Linda inherited the account from her father, since he was subject to RMDs, Linda was subject to the 10-year rule and annual RMDs. Linda passed in 2024, her daughter Kelly inherits her Inherited IRA, and Kelly would be required to fully deplete the inherited IRA by 2032 (Linda original 10 year rule date), she would be required to take annual RMD’s from the account because Linda was receiving RMDs, and if Linda did not receive her full RMD in 2024 when she passed, Kelly would have to distribute any amount that Linda would have been required to take in the year that she passes.
A lot of rules, but all very important to avoid the IRS penalties that await the taxpayers that fail to take the proper RMD amount or fail to adhere to the new 10-year rule.
Summary of 3 Successor IRA Questions
When you are the beneficiary of an inherited IRA, you must be able to answer the following questions:
Was the person that you inherited the inherited IRA from subject to the 10-year rule?
Was the person that you inherited the Inherited IRA from required to take annual RMDs?
Did the decedent take their RMD before they passed?
What was the age of the decedent when that passed?
The last question is important because there are potential situations where someone is the original beneficiary of an Inherited IRA subject to the 10-year rule, based on the age of the original owner when they passed and the age when the original beneficiary when they inherited the IRA may not make them subject to the annual RMD requirement. However, if the original beneficiary passes away after their “Required Beginning Date” for RMDs, the beneficiary of that inherited IRA may be subject to an annual RMD requirements even though the original beneficiary was not.
The IRS has unfortunately made the rules very complex for beneficiaries of an Inherited IRA account, so I would strongly recommend consulting with a professional to make sure you fully understand the rules.
General Rules Successor IRA Rules
If you are a successor beneficiary:
If the owner on the inherited IRA was subject to the stretch rule, you as the successor beneficiary are now subject to the 10-year rule
If the owner of the Inherited IRA was subject to the 10-year rule, you have whatever time is remaining within that original 10 year window to deplete the account balance.
Whether or not you have to take an RMD in the year they pass and in future years, is more complex, seek help from a professional.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Final Rules For Non-spouse Beneficiary Inherited IRAs Has Been Released: The 10-Year Rule, Annual RMD Requirement, Tax Strategies, New 401(k) Roth Rules, and More…….
In July 2024, the IRS released its long-awaited final regulations clarifying the annual RMD (required minimum distribution) rules for non-spouse beneficiaries of retirement accounts that are subject to the new 10-year rule. But like most IRS regulations, it’s anything but simple and straightforward.
In July 2024, the IRS released its long-awaited final regulations clarifying the annual RMD (required minimum distribution) rules for non-spouse beneficiaries of retirement accounts that are subject to the new 10-year rule. But like most IRS regulations, it’s anything but simple and straightforward. The short answer is for non-spouse beneficiaries that are subject to the 10-year rule; some beneficiaries will be required to begin taking annual RMDs starting in 2025 while others will not. In this article, we will review:
The RMD requirement for non-spouse beneficiaries
RMD start date
IRS penalty relief for missed RMDs
Are one-time distributions required for missed RMDs 2020 - 2024?
Different RMD rules for Traditional IRAs versus Roth IRAs
Different RMD rules for Roth 401(k) versus Roth IRAs
Common RMD mistake for stretch rule beneficiaries
In addition to covering the topics above related to the new RMD rules, we want this article to be a “one-stop shop” for non-spouse beneficiaries to understand how these non-spouse inherited IRAs work from start to finish, so we will start this article by covering:
How Inherited IRA work for non-spouse beneficiaries
Rules for a decedent that pass either before or after 2019
The new 10-year Rule
Beneficiaries that are granted an exception to the new 10-year rule
Required minimum distributions (RMDs)
Taxation of distributions from inherited IRAs
Tax strategies and Pitfalls associated with Inherited IRA accounts
Special rules for minor children with Inherited IRAs
(If you are reading this just for the new RMD rules, you can skip to the second half of the article)
Non-spouse Beneficiaries of Retirement Accounts
When you inherit a retirement account, there are different options available to you depending on whether you are a “spouse beneficiary” or a “non-spouse beneficiary”. In this article, we are going to be focusing on the options available to a non-spouse beneficiary.
Non-spouse Beneficiary Rules Prior to 2020
In 2019, the SECURE Act 1.0 was passed, which greatly limited the inherited IRA options that were available to non-spouse beneficiaries of IRAs, 401(k)’s, and other types of employer-sponsored retirement plans. Under the old rules, if someone passed away prior to January 1, 2020, you as a non-spouse beneficiary, were allowed to move the balance of that IRA into an inherited IRA in your name, avoid any immediate tax implications, and you only had to take small distributions each year called RMDs (required minimum distributions) based on IRS life expectancy table. This was called the “stretch rule” which allowed a non-spouse beneficiary to stretch the distributions over their lifetime.
If you wanted to take more out of the account, you could, since it’s an inherited IRA, even if you were under the age of 59 ½, you avoided the 10% early withdrawal penalty and either had to pay income tax on a pre-tax retirement account or avoided tax altogether on Roth inherited IRA accounts. These beneficiaries had a lot of flexibility with this option with minimal emergency tax planning needed.
For individuals in this camp who inherited a retirement account from someone who passed away prior to January 1, 2020, the good news is you are grandfathered in under the old rules, and none of the changes that we are going to cover in this article apply to you. You still have access to the stretch provision.
Non-spouse Beneficiary of Decedent That Passed After December 31, 2019
SECURE Act 1.0, which passed in 2019, took away the “stretch option” for most non-spouse beneficiaries and replaced it with a much more restrictive “10-Year Rule,” which requires a non-spouse beneficiary to fully deplete the account balance of that inherited retirement account within 10 years start the year after the decedent passed away. If you inherited a retirement account from someone who passed away AFTER December 31, 2019, and you are non-spouse beneficiaries, you are subject to the new 10-Year Rule UNLESS you meet one of the exceptions. Non-spouse beneficiaries that qualify for an exception to the 10-year rule are referred to as “Eligible Designated Beneficiaries” in the new tax regulations if you choose to read the 260 pages that were just released by the IRS.
Here is the list of beneficiaries that are exempt from the new 10-year rule and still have the stretch option available to them:
Surviving spouse
Person less than 10 years younger than the decedent
Minor children
Disabled person
Chronically ill person
Some See-Through Trusts benefitting someone on this exception list
Non-Spouse Beneficiary Not More Than 10 Years Younger Than The Decedent
I wanted to highlight this exception because it’s the most common exception to the 10-rule for non-spouse beneficiaries that we see amongst our clients. If you are a non-spouse beneficiary of a retirement account from someone that was not more than 10 years younger than you like a sibling or a cousin, the new 10-year distribution rule does not apply to you. You are allowed to roll over the balance to your own inherited IRA and stretch annual RMDs over your lifetime.
Example: Tim passes away at the age of 55 and his sister Susan age 58 is the 100% primary beneficiary of his Traditional IRA account, since Susan is a non-spouse beneficiary, she normally would be subject to the 10-year rule requiring her to fully distribute and pay tax on Tim’s IRA balance within a 10 year period. However, since Tim was less than 10 years younger than Susan, she qualifies for the exception to the 10-year rule. She can rollover Tim’s IRA balance into an Inherited IRA in her name, and she would only be required to take small required minimum distributions each year starting the year after Tim passed away.
Minor Children As Beneficiary of Retirement Accounts
The minor child exception is a little tricker. If a minor child is the beneficiary of a retirement account, and they inherited the retirement account from their parents, they are only required to take those small annual RMDs until they reach age 21, but then as soon as they turn 21, they switch over to the 10-Year Rule. If they inherited the retirement account from someone other than their parent, then the 10-year period begins the year after the decedent passes away like the rest of the non-spouse beneficiaries.
Example: Josh is age 12 and his mother unexpectedly passes away and Josh is listed as the primary beneficiary on his mother’s 401(K) account at work. Josh, as a non-spouse beneficiary, would not immediately be subject to the 10-year rule, but instead, he would be temporarily allowed to use the stretch provision; he would be required to take annual RMDs each year from the retirement account until he reaches age 21. Once Josh reaches age 21, he will then be subject to the 10-year rule, and he will be required to fully distribute the retirement account 10 years following when he turns age 21.
Age of Majority: Normally the “age of majority” is defined by the state that the minor lives in. For some states, it’s age 18, and in other states, it’s age 21. The new IRS regulations addressed this issue and stated that regardless of the age of majority for the state that the minor lives in and regardless of whether or not the child is a student past the age of 18, the age of majority for purposes of triggering the 10-year rule for non-spouse beneficiaries will be age 21.
Non-Spouse Beneficiary Subject To The 10-Year Rule
If you are a non-spouse beneficiary who inherited a retirement account from someone who passed away AFTER December 31, 2019, and you DO NOT qualify for one of the exceptions previously listed, then you are subject to the new “10-Year Rule”. The 10-Year Rule requires a non-spouse beneficiary to fully deplete the inherited retirement account balance no later than 10 years following the year after the decedent passes away.
The 10-Year Rule Applies to Both Pre-Tax and Roth Retirement Accounts
Regardless of whether you inherited a pre-tax retirement account like a Traditional IRA, SEP IRA, or 401(k) account or a Roth retirement account like a Roth IRA or Roth 401(k), the 10-year rule applies.
Example: Sarah’s father just passed away in February 2024, and she was the 100% primary beneficiary of his Traditional IRA account with a balance of $300,000. Sarah is age 60. Sarah, as a non-spouse beneficiary, would be subject to the 10-year rule and would be required to fully distribute and pay tax on the full $300,000 before December 31, 2034, which is 10 years following the year after her father passed away.
The RMD Mystery
When the 10-Year Rule first came into being in 2020, it was assumed that this 10-year rule was an extension of the previous “5-year rule”, which only required the beneficiary to deplete the account balance within 5 years but there was no annual RMDs requirement during that 5-year period. The IRS just simply eliminated the “stretch option” and extended the 5-year rule to a 10-year rule.
But then, two after the IRS passed SECURE Act 1.0 with this new 10-year rule, the IRS came out with new proposed regulations that basically said, “Whoops, I know we wrote it that way, but that’s not what we meant.”
In the proposed regulations that the IRS released in February 2022, the IRS clarified that what they meant to say was that certain non-spouse beneficiaries that are subject to the new 10-year rule would ALSO be required to take annual RMDs during that 10-year period. This was not welcome news for many non-spouse beneficiaries, and it created a lot of confusion since a few years had already gone by since the new 10-year rule was signed into law.
The New RMD Rules for Inherited IRA for Non-spouse Beneficiaries
The finalized IRS regulations that were just released in July 2024 made their stance official. Whether or not a non-spouse beneficiary will be subject to BOTH the 10-Year Rule and annual RMDs will be dependent on two factors:
The age of the decedent when they passed away
The type of retirement account that the beneficiary inherited (Pre-tax or Roth)
RMD Requirement Based on Age of Decedent
If you are the original owner of a retirement account (Traditional IRA, 401(k), etc.), once you reach a specific age, the IRS requires you to start taking small distributions from that pre-tax account each year, which are called required minimum distributions (RMDs).
The age at which you are required to begin taking RMDs is called your Required Beginning Date (“RBD”), not to be confused with the “RMD”. There are too many acronyms in the finance world “The IRS wants you to take your RMD by your RBD ASAP so they can collect their TAX.”
The date at which RMDs are required to begin varies based on your date of birth:
Born 1950 or earlier: Age 72
Born 1951 – 1959: Age 73
Born 1960 or later: Age 75
Someone that is born in 1956 would be required to start taking RMDs from their pre-tax retirement accounts at age 73. Why is this relevant to non-spouse beneficiaries? Because whether or not the decedent died before or after their Required Beginning Date for RMDs will determine whether or not you, as the non-spouse beneficiary, are required to take annual RMDs during the 10-Year Rule period.
The Decedent Passes Away Prior to Their RMD Required Beginning Date
If the decedent passed away prior to their Required Beginning Date, then you, as the non-spouse beneficiary, are subject to the 10-Year Rule, but you ARE NOT REQUIRED to take annual RMDs during the 10-year period. You simply have to deplete the account balance prior to the end of the 10 years.
Example: Brad’s father passes away at age 68 and Brad is the 100% beneficiary of his Traditional IRA. Brad’s father was born in 1956, making his RMD start at age 73. Since Brad’s father passed away prior to reaching age 73 (RBD), Brad would be subject to the 10-year rule but would not be required to take annual RMDs during that 10-year period.
The Decedent Passes Away After Their RMD Required Beginning Date
If the decedent passes away AFTER their Required Beginning Date for RMDs, then the non-spouse beneficiary is subject to BOTH the 10-year rule AND is required to take annual RMDs during that 10-year period.
Example: Dave’s father passed away at age 80, and he had been taking RMDs for many years since he was beyond his Required Beginning Date. When Dave inherits his father’s Traditional IRA, he will not only be subject to the 10-year rule as a non-spouse beneficiary, but he will also be required to distribute annual RMDs every year from the Inherited IRA account since his father had already begun receiving RMDs for his account.
RMDs Not Required Until 2025
Since the IRS just released the final regulation in July 2024, for non-spouse beneficiaries that are subject to both the 10-Year Rule and annual RMDs, RMDs are not required to begin until 2025.
Good news: For non-spouse beneficiaries subject to the 10-year rule, the IRS has waived all penalties for the “missed RMDs” between 2020 and 2024, and they are not requiring these non-spouse beneficiaries to “make up” for missed RMDs for years leading up to 2025. The RMDs will be calculated in 2025 like everything has been working smoothly since Day 1.
No Reset of the 10-Year Depletion Timeline
It’s important to note that even though the IRS took 4 years to clarify the RMD rules associated with the new 10-year rule, it does not reset the 10-year clock for the depletion of the inherited retirement account.
Example: Jessica’s uncle passed away in 2020 at the age of 82. Jessica, as a non-spouse beneficiary, would be subject to the 10-year rule requiring her to fully deplete the Traditional IRA by December 31, 2030. Since her uncle was past his Required Beginning Date for RMDs, Jessica would be required to take annual RMD in the years 2025 – 2030. (Note that the 2021 – 2024 RMDs were waived due to the IRS delay). Even though her first RMD will not be until 2025, she is still required to deplete the Traditional IRA account by December 31, 2030.
Annual RMD Rules
Many of these examples incorporate the delay in annual RMDs due to the delay in the IRS regulations being released. However, if someone passes away in 2024 and has a non-spouse beneficiary listed on their pre-tax retirement account, the 10-year timeline and the first annual RMD calendar would begin in 2025, which is the year following the decedent’s date of death.
The first RMD is required to be taken by a non-spouse beneficiary by December 31st of the year following the decedent's death.
Inherited Roth IRAs – No RMD Requirement
You will notice in most of my examples that I specifically use a “Traditional IRA” or “Pre-tax Retirement Account.” That is because only pre-tax retirement accounts have the RMD requirement. If you are the original owner of a Roth IRA, Roth IRAs do not require you to take an RMD regardless of your age. So, under the new rules, if you inherit a Roth IRA, since the decedent would not have been required to take an RMD from a Roth IRA at any age, they never had a “Required Beginning Date”. This makes the non-spouse beneficiary subject to the 10-year rule, but no annual RMDs would be required from an inherited Roth IRA.
Note: If you inherit a Roth IRA and you are eligible for the stretch options, annual RMDs are then required from you Inherited Roth IRA account.
Roth 401(k)s Are Different
While typically, Roth IRAs and Roth 401(k)s have the same rules, the IRS included a weird rule for Roth 401(k)s in the final regulations regarding the RMD requirement. If you inherit a 401(k) plan, it’s possible that there are both Pre-tax and Roth monies within that same account since most 401(k) plans allow plan participants to make either pre-tax deferrals or Roth deferrals to the plan.
Normally I would have thought if a 401(k) account contains both Pre-tax and Roth dollars, as a non-spouse beneficiary, you would have the 10-year rule for the full account balance, but you could ignore the RMD requirement for the Roth dollars, but the annual RMDs on the pre-tax portion of the account would depend on whether or not the decedent passed away before or after their Required Beginning Date for RMDs. Assuming this, I would have been correct for the pre-tax portion of the 401(k) account but potentially wrong about no annual RMDs for the Roth portion of the 401(k) account.
The final regulations state that if the 401(k) account contains ONLY Roth dollars, no pre-tax dollars within the account, then a non-spouse beneficiary is subject to the 10-year rule but DOES NOT have to take annual RMDs during that 10-year period.
However, if the 401(k) account contains both Roth and any other type of pre-tax source, like employee pre-tax deferrals, employer match, and employer profit sharing, which is much more common for 401(k) plans, then the ENTIRE BALANCE in the 401(k) plan, INCLUDING THE ROTH SOURCE, is subject to the annual RMD requirement during the 10-year period. Yuck!!!
This new rule will encourage individuals who have a Roth source within their employer-sponsored retirement plans to roll over their Roth monies within the plan to a Roth IRA before they pass away. By removing that Roth source from the employer-sponsored retirement plans and moving it into a Roth IRA, now when the non-spouse beneficiary inherits the Roth IRA, they are allowed to accumulate those Roth dollars longer within the 10-year period since they are not required to take annual RMDs from a Roth IRA account.
Note: The pre-tax sources within a 401(k) works the same way as inheriting a Traditional IRA. A non-spouse beneficiary would be subject to the 10-year rule and may or may not have to take RMDs during the 10-year period depending on whether or not the decedent dies before or after their Required Beginning Date for RMDs.
Non-Spouse Beneficiaries Eligible For The Stretch Rule Only Had An RMD Waiver for 2020
In 2020, part of the COVID relief packages was the ability to waive taking an RMD during that calendar year. I have run into a few cases where non-spouse beneficiaries that were grandfathered in under the “stretch rules” requiring them to take an annual RMD each year, are getting confused with the delay in the RMD requirement for non-spouse beneficiaries that are subject to the new 10-year rule after December 2019. The delay in the annual RMDs until 2025 for non-spouse beneficiaries ONLY applies to individuals subject to the 10-year rule. If you inherited a retirement account from someone who passed away prior to 2020 or you qualify for one of the exceptions to the 10-Year Rule as a non-spouse beneficiary, you are grandfathered in under the old “Stretch Rule,” which requires the owner of that Inherited IRA to take annual RMD’s from that account each year starting in the calendar year following the decedent’s date of death.
In summary, if you are a stretch rule non-spouse beneficiary, the only year you were allowed to skip your RMD was 2020 per the COVID relief; you should have restarted your annual RMDs in 2021 and taken an RMD for 2021, 2022, and 2023, and subsequent years. If you missed this, the good news is the Secure Act 2.0 also lowered the IRS penalty amount for missed RMDs, from 50% to 25% and even lower to 10% if timely corrected.
Non-Spouse Inherited IRA Tax Strategies
We will be writing a separate article that contains all of the advanced tax strategies that we implement for clients who are non-spouse beneficiaries subject to the 10-year rule since there are a number of them, but here is some of the standard guidance that we provide to our clients.
If you inherit a Roth IRA, that is an ideal situation because even though you are subject to the 10-year rule as a non-spouse beneficiary, all of the accumulation in an Inherited Roth IRA can be withdrawn tax-free.
Example: John inherits a $200,000 Roth IRA from his mother in 2024. John, as a non-spouse beneficiary, will be subject to the 10-year rule, so the account has to be depleted by 2034, but he is not required to take annual RMDs because it’s a Roth IRA account. If John invests the $200,000 wisely and receives an 8% annual rate of return, at the end of 10-year the $200,000 has grown to $431,785 within that Inherited Roth IRA, and the full balance will be distributed to him ALL TAX-FREE.
For this reason, we have a lot more clients processing Roth Conversions in retirement to push more of their net worth from the pre-tax bucket over to the Roth bucket, which is much more favorable for non-spouse beneficiaries when they inherit the account.
For clients that inherit larger pre-tax retirement accounts that are subject to the 10-year rule, we have to develop a detailed tax plan for the next 10 years since we know all of that money will need to be distributed and taxed within the next 10 years, which could cause the money to be taxed at a higher tax rate, increased Medicare premiums, lower financial aid awards for parents with kids in college, have their social security taxed at a higher rate, lose tax deductions, or other negative consequences for showing too much income in a single year.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
2023 RMDs Waived for Non-spouse Beneficiaries Subject To The 10-Year Rule
There has been a lot of confusion surrounding the required minimum distribution (RMD) rules for non-spouse, beneficiaries that inherited IRAs and 401(k) accounts subject to the new 10 Year Rule. This has left many non-spouse beneficiaries questioning whether or not they are required to take an RMD from their inherited retirement account prior to December 31, 2023. Here is the timeline of events leading up to that answer
There has been a lot of confusion surrounding the required minimum distribution (RMD) rules for non-spouse beneficiaries who inherited IRAs and 401(k) accounts subject to the new 10-Year Rule. This has left many non-spouse beneficiaries questioning whether or not they are required to take an RMD from their inherited retirement account prior to December 31, 2023. Here is the timeline of events leading up to that answer:
December 2019: Secure Act 1.0
In December 2019, Congress passed the Secure Act 1.0 into law, which contained a major shift in the distribution options for non-spouse beneficiaries of retirement accounts. Prior to the passing of Secure Act 1.0, non-spouse beneficiaries were allowed to move these inherited retirement accounts into an inherited IRA in their name, and then take small, annual distributions over their lifetime. This was referred to as the “stretch option” since beneficiaries could keep the retirement account intact and stretch those small required minimum distributions over their lifetime.
Secure Act 1.0 eliminated the stretch option for non-spouse beneficiaries who inherited retirement accounts for anyone who passed away after December 31, 2019. The stretch option was replaced with a much less favorable 10-year distribution rule. This new 10-year rule required non-spouse beneficiaries to fully deplete the inherited retirement account 10 years following the original account owner’s death. However, it was originally interpreted as an extension of the existing 5-year rule, which would not require the non-spouse beneficiary to take annual RMD, but rather, the account balance just had to be fully distributed by the end of that 10-year period.
2022: The IRS Adds RMDs to the 10-Year Rule
In February 2022, the Treasury Department issued proposed regulations changing the interpretation of the 10-year rule. In the proposed regulations the IRS clarified that RMDs would be required for select non-spouse beneficiaries subject to the 10-year rule, depending on the decedent’s age when they passed away. Making some non-spouse beneficiaries subject to the 10-year rule with no RMDs and others subject to the 10-year rule with annual RMDs.
Why the change? The IRS has a rule within the current tax law that states that once required minimum distributions have begun for an owner of a retirement account the account must be depleted, at least as rapidly as a decedent would have, if they were still alive. The 10-year rule with no RMD requirement would then violate that current tax law because an account owner could be 80 years old, subject to annual RMDs, then they pass away, their non-spouse beneficiary inherits the account, and the beneficiary could voluntarily decide not to take any RMDs, and fully deplete the account in year 10 in accordance with the new 10-year rule. So, technically, stopping the RMDs would be a violation of the current tax law despite the account having to be fully depleted within 10 years.
In the proposed guidance, the IRS clarified, that if the account owner had already reached their “Required Beginning Date” (RBD) for required minimum distributions (RMD) while they were still alive, if a non-spouse beneficiary, inherits that retirement account, they would be subject to both the 10-year rule and the annual RMD requirement.
However, if the original owner of the IRA or 401k passes away prior to their Required Beginning Date for RMDs since the RMDs never began if a non-spouse beneficiary inherits the account, they would still be required to deplete the account within 10 years but would not be required to take annual RMDs from the account.
Let’s look at some examples. Jim is age 80 and has $400,000 in a traditional IRA, and his son Jason is the 100% primary beneficiary of the account. Jim passed away in May 2023. Since Jason is a non-spouse beneficiary, he would be subject to the 10-year rule, meaning he would have to fully deplete the account by year 10 following the year of Jim’s death. Since Jim was age 80, he would have already reached his RMD start date, requiring him to take an RMD each year while he was still alive, this in turn would then require Jason to continue those annual RMDs during that 10-year period. Jason’s first RMD from the inherited IRA account would need to be taken in 2024 which is the year following Jim’s death.
Now, let’s keep everything the same except for Jim’s age when he passes away. In this example, Jim passes away at age 63, which is prior to his RMD required beginning date. Now Jason inherits the IRA, he is still subject to the 10-year rule, but he is no longer required to take RMDs during that 10-year period since Jim had not reached his RMD required beginning date at the time that he passed.
As you can see in these examples, the determination as to whether or not a non-spouse beneficiary is subject to the mandatory RMD requirement during the 10-year period is the age of the decedent when they pass away.
No Final IRS Regs Until 2024
The scenario that I just described is in the proposed regulations from the IRS but “proposed regulations” do not become law until the IRS issues final regulations. This is why we advised our clients to wait for the IRS to issue final regulations before applying this new RMD requirement to inherited retirement accounts subject to the 10-year rule.
The IRS initially said they anticipated issuing final regulations in the first half of 2023. Not only did that not happen, but they officially came out on July 14, 2023, and stated that they would not issue final regulations until at least 2024, which means non-spouse beneficiaries of retirement accounts subject to the 10-year rule will not face a penalty for not taking an RMD for 2023, regardless of when the decedent passed away.
Heading into 2024 we will once again have to wait and see if the IRS comes forward with the final regulations to implement the new RMDs rules outlined in their proposed regs.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
