Treasury and IRS Release Final Regulations on Required Minimum Distributions
Since February 2022, when Treasury and the Internal Revenue Service (IRS) issued Proposed Regulations implementing changes to the required minimum distribution (RMD) rules for individual retirement accounts and employer plans under the SECURE Act and the SECURE 2.0 Act, attorneys and financial professionals have awaited Final Regulations.
In general terms, SECURE and SECURE 2.0 created a 10-year rule where most beneficiaries inheriting retirement plans after 2019 must distribute the full account within 10 years after the owner’s death. There is a distinction between if the plan owner died before or after he/she was required to take RMDs (this is called the Required Beginning Date (RBD)). There is a distinction between “designated beneficiaries” (which are most beneficiaries) and “eligible designated beneficiaries” (which are a select group of individuals entitled to special treatment comprised of spouses, minor children, disabled individuals, chronically ill individuals, and individuals not more than 10 years younger than the plan owner).
A significant question post-SECURE has been whether a beneficiary must take annual RMDs within the 10-year period.
Proposed Regulations issued in February 2022 answered yes, which was widely criticized.
On July 19, 2024, Treasury and the IRS issued Final Regulations affirming that answer. The Final Regulations provide that beneficiaries of benefits inherited from a decedent who died after his or her RBD must follow both the 10-year rule and the “at least as rapidly” rule. Therefore, such beneficiaries must take RMDs for the first nine years at the same rate as the participant had adopted before his or her death.
The Final Regulations make only small changes to the Proposed Regulations.
The Final Regulations confirm the 10-year rule applies to four classes of post-2019 beneficiaries (and applies in the following ways):
- A designated beneficiary who inherits a retirement account from an owner who died before their RBD. In this case, distributions are optional until the 10th year, when any remaining balance must be fully distributed.
- An eligible designated beneficiary who inherits a retirement account from someone who died before their RBD. Here, too, distributions are optional until the 10th year, when the account must be fully distributed. An eligible designated beneficiary may choose between this 10-year rule and the life expectancy rule under which distributions could be taken over the full length of their life expectancy.
- A designated beneficiary who inherits a retirement account from a participant who died on or after their RBD. In this case, the designated beneficiary must take annual distributions and empty the account by the 10th year following the year the account owner died.
- A successor beneficiary who inherits a retirement account from an eligible designated beneficiary who was taking life expectancy distributions. The successor beneficiary must continue taking distributions at the same rate as the primary beneficiary. In addition, the successor beneficiary must ensure the account is fully distributed by the 10th year following the year the eligible designated beneficiary died.
At the same time as issuing the Final Regulations, Treasury and the IRS issued Proposed Regulations on RMDs from various retirement plans, addressing several issues that were not covered in the Final Regulations. These topics include age determinations, designated Roth account distributions, Code Sec. 4974 excise tax waivers, and spousal elections.
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