The recently finalized rules for required minimum distributions (RMDs) and inherited IRAs, effective January 1, 2025, introduce significant changes for beneficiaries. Under the SECURE Act of 2019, the stretch IRA strategy was largely eliminated, limiting the ability to stretch tax-deferred growth over multiple generations. Instead, a 10-year rule now applies to most beneficiaries, requiring them to fully distribute the inherited IRA within 10 years, though exceptions exist for certain “eligible designated beneficiaries.” These changes affect both traditional and Roth IRAs, with a focus on ensuring that tax-deferred accounts are distributed in a timely manner, allowing the IRS to collect taxes sooner.
One of the most significant updates is the clarification regarding RMDs for beneficiaries who inherit an IRA from someone who was already subject to RMDs. Previously, there was confusion about whether beneficiaries under the 10-year rule were required to take RMDs each year. Under new guidance, beneficiaries inheriting from someone who had already started RMDs must continue taking annual distributions. For those who failed to do so in 2021-2024, the IRS has waived the excise tax penalties, but this waiver will not extend beyond 2024.
For Roth IRAs, while account holders are not subject to RMDs during their lifetime, beneficiaries still face the 10-year distribution rule. Importantly, Roth IRA beneficiaries do not need to take annual RMDs during the 10-year period but must fully distribute the account by the end of the 10th year. This gives beneficiaries flexibility in managing their withdrawals, particularly for tax-free Roth accounts, where delaying distributions can maximize the account’s growth potential.
Overall, the changes aim to simplify and standardize the rules while ensuring that inherited retirement accounts are not left untouched for extended periods. However, beneficiaries should carefully consider their tax planning strategies, particularly in the final year of the 10-year window, to avoid a large tax bill from distributing the remaining account balance all at once.