Inherited IRAs: Recent Legislative Update on RMDs and the 10-Year Rule

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December of 2019. This Act limited some options available to beneficiaries of IRAs and other retirement plans.  One of the significant changes was the loss of the ability to “stretch” distributions over multiple generations for designated beneficiaries who are not considered Eligible Designated Beneficiaries¹.

Under prior law, a designated beneficiary of an inherited account could elect to take distributions over their life expectancy. With the SECURE Act, a designated beneficiary  cannot treat the inherited IRA as their own but is required to liquidate the inherited account over a ten-year period after the account owner’s death (10-Year Rule).  Note, however, there was no requirement for the designated beneficiary to take distributions during the first nine years.

Then the IRS issued Proposed Regulations in February of 2022 intended to clarify some of the provisions of the SECURE Act related to beneficiary designations and distribution options that appeared to be inconsistent.  Under the proposed regulations, if the original account owner died after December 31, 2019, and was taking Required Minimum Distributions (RMDs), the designated beneficiary must take annual RMDs over the 10-Year period. Due to this inconsistency and delay in issuing final regulations, the IRS waived RMDs under the 10-Year Rule for years 2020 through 2023.

As final regulations have yet to be released, the IRS has again waived RMDs under the 10-Year Rule for 2024². What does this mean for designated beneficiaries subject to the 10-Year Rule who inherited an IRA over the past few years? These beneficiaries have the following options:

• Do nothing and wait for final guidance from the IRS. This allows the inherited account to continue to grow on a tax-deferred basis but may require a larger lump sum taxable distribution in the 10^th
• Begin taking taxable distributions as needed to meet personal needs.
• Use the taxable distributions to purchase life insurance and leave a financial legacy to your beneficiaries that is typically not income taxable.

The IRS has indicated that final regulations are anticipated to be issued and effective as of January 1, 2025. National Life Group will continue to monitor the regulatory progress regarding inherited IRAs.

National Life Group does not give legal or tax advice. The information is intended to be for educational purposes only. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid tax penalties that may be imposed upon a taxpayer. Moreover, this presentation is not intended to be an all-inclusive review of estate planning concepts and strategies. Clients should consult with an appropriate legal or tax professional prior to acting upon any of the information contained herein.

1. An Eligible Designated Beneficiary is the spouse or minor child of the deceased account owner; disabled or chronically ill individual; an individual who is not more than 10 years younger than the account owner.
2. IRS Notice 2024-35. https://www.irs.gov/pub/irs-drop/n-24-35.pdf