Finally, after close to 4½ years, on July 19, 2024, the IRS and Treasury Department released final regulations on the Required Minimum Distribution (RMD) rules. RMDs are mandated yearly withdrawals from retirement plans, including Self-Directed IRAs, 401(k)s, and other tax-deferred plans. In general, the required minimum beginning date for RMDs is when the IRA owner reaches the age of 73. Note – Roth IRAs are not subject to these rules.

The final RMD regulations clarify several RMD issues that arose from the release of SECURE Act, which took effect in 2020, and SECURE 2.0, which was signed into law at the end of 2022. However, the main question the final RMD regulations sought to clarify was whether a non-spouse beneficiary would be required to take RMDs over a ten-year period or whether one could wait and withdraw the entire amount at the end of the decade. 4½ years to clarify a relatively simple RMD question is a bit much, but, at least, we finally have clarification on how the ten-year RMD rules work.

The final regulations new rules start taking effect on January 1, 2025.

The RMD 10-Year Rule

The easiest way to understand how the RMD rules work is to differentiate between whether the IRA owner began taking RMDs before the age of 73 and whether the beneficiary is deemed an eligible designated beneficiary or not.  

When it comes to understanding the final RMD rules is that for most IRA beneficiaries, they must take annual RMDs pro rata throughout the 10 years, with the account fully depleted by the end of the tenth year.  However, there are several exceptions to this rule. For example, if the IRA owner died before reaching their RMD age, the beneficiary can take up to ten years to deplete the IRA and does not have to take continuous pro rata IRA RMDs. Additionally, an IRA beneficiary deemed an “eligible designated beneficiary” is not subject to the required ten-year rule and can use a more flexible RMD option, such as their life expectancy. 

Eligible Designated Beneficiaries

An individual who satisfies the definition of an eligible designated beneficiary is afforded more flexible options when it comes to taking RMD distributions.

An eligible designated beneficiary is defined in IRS Publication 590-B as the IRA owner’s surviving spouse; the IRA owner’s minor child; a disabled or chronically ill individual; or any other individual who is not more than 10 years younger than the IRA owner, such as a sibling.

They have other options for taking RMDs for an Inherited IRA and are not limited to the 10-year rule:

• If the original IRA owner had not already begun taking RMDs, then an eligible designated beneficiary can either choose to take RMDs consistent with their life expectancy or elect the 10-year rule.
• If the original IRA owner died after taking RMDs, then the IRA eligible designated beneficiary can take RMDs consistent with the longer of their life expectancy or that of the original IRA owner.

For IRA beneficiaries under the age of 21: Their 10-year clock does not start until they turn 21. In the situation where the original IRA owner has left assets to multiple minor children, “a full distribution is not required until ten years after the youngest of the employee’s children who are designated beneficiaries attains the age of 21.”

At age 21, the beneficiary will have to take RMDs every year consistent with their life expectancy.

Ineligible Beneficiaries

In the case of an IRA beneficiary that is not an eligible designated beneficiary, in general, the 10-year rule is mandatory for ineligible beneficiaries, often adult children of the deceased IRA owner.

Summary of the final RMD rules for ineligible beneficiaries.

• When the original IRA owner has begun taking RMDs, the beneficiary must take RMDs “at least as rapidly” – pro rata over 10 years – as the IRA owner had been. In the event there are assets remaining at the end of 10 years, the remaining balance must be depleted.
• If the original IRA owner had not taken an RMD, then the ineligible beneficiary does not need to take RMDs and can choose to simply withdraw the entire balance at the end of 10 years.

Roth IRA and the 10-Year Rule

In the case of a Roth IRA, whether the owner dies before or after age 73, the beneficiary is subject to the same rules that apply to a traditional IRA that apply if the owner dies before the required beginning date. 

Hence, the Roth IRA beneficiary can wait 10 years to take any distributions, but they must distribute the whole Roth within 10 years. Alternatively, if the beneficiary is an eligible designated beneficiary, the beneficiary can elect to “stretch” the payments, but to do so, he or she must begin taking distributions starting with the year after original Roth IRA owner’s death. In any event, all Roth IRA RMDs would be tax free.

Conclusion

The final RMD regulations generally reflect amendments to the RMD rules that Congress made as part of the SECURE Act of 2019 and reflect some provisions from the SECURE 2.0, which were not reflected in the 2022 proposed regulations.  The fact that it took almost five years to finalize the RMD rules is embarrassing, but at least it has been finalized.

As a basic rule for most of us, we will have to take RMDs pro rata over ten years if the original IRA owner is a parent or more than ten years older than the beneficiary and the beneficiary is not under the age of 21. However, if the original IRA owner dies before the age of 73, the non-spouse beneficiary would have ten years to deplete the IRA. Whereas eligible designated beneficiaries would have more flexibility other than using the ten-year rule and could stretch the RMDs over a longer period of years, such as their life expectancy. In the case of a Roth IRA, the non-spousal inherited IRA beneficiary would have ten years to deplete the IRA and would not have to take RMD pro-rata over ten years, but would simply be required to deplete the Roth IRA by the end of year ten. Don’t forget, these rules go into effect beginning on January 1, 2025.