The IRS recently issued final regulations on the Setting Every Community Up for Retirement Enhancement Act, which was passed in late 2019. These regulations mostly mirror the proposed regulations from 2022. Despite receiving numerous requests for changes, the IRS decided to maintain the controversial rule relating to the new 10-year rule for inherited IRAs and other retirement accounts.
Under previous laws, beneficiaries of IRAs and retirement accounts were able to take annual required minimum distributions (RMDs) over their life expectancy, a strategy known as the Stretch IRA. However, the SECURE Act eliminated the Stretch IRA and replaced it with the 10-year rule. This rule requires most beneficiaries to fully distribute the IRA within 10 years after inheriting it.
The IRS regulations distinguish between two groups of inherited IRAs. For IRAs whose original owners had not yet reached the age for RMDs, beneficiaries have flexibility in how they distribute the IRA as long as it is fully distributed within 10 years. However, for IRAs whose original owners had begun taking RMDs, beneficiaries must continue the distributions based on the schedule the owner was using during years one through nine after inheriting and fully distribute the IRA by the end of year 10.
The 10-year rule applies to both traditional and Roth accounts, but beneficiaries of Roth IRAs do not have to take RMDs during years one through nine since the original owners of Roth IRAs are not required to take RMDs. While there was controversy surrounding the proposed regulations requiring annual RMDs in years one through nine, the IRS decided not to make this requirement retroactive and penalties for failing to take these distributions will be waived until 2025.
In practice, the 10-year rule and annual RMD requirement only affect a small number of beneficiaries. Most beneficiaries typically distribute inherited IRAs fairly quickly after gaining ownership of the accounts. The final regulations provide clarification on the rules surrounding inherited IRAs and retirement accounts, ensuring that beneficiaries understand their obligations and options for distributions.
