On July 19, 2024, the IRS issued new regulations clarifying the rules surrounding inherited IRAs, providing essential guidance for beneficiaries and financial planners. These updates primarily focus on implementing the SECURE Act’s provisions and the adjustments beneficiaries must make to comply with the new requirements.

Key Clarifications on the 10-Year Rule

The SECURE Act’s 10-year Rule mandates that non-spouse beneficiaries deplete inherited IRAs within ten years of the original account holder’s death. The July 19, 2024, regulations specify that if the account holder was taking required minimum distributions (RMDs) at the time of their death, the beneficiary must continue to take annual RMDs based on the deceased’s schedule until the end of the 10-year period. This clarification ensures that beneficiaries cannot simply wait until the 10th year to withdraw the entire balance.

Eligible Designated Beneficiaries (EDBs)

The new regulations reaffirm the exceptions to the 10-year Rule for Eligible Designated Beneficiaries (EDBs). EDBs include the surviving spouse, minor children (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the deceased. These beneficiaries can still stretch distributions over their life expectancy. However, once minor children reach the age of majority, the 10-year Rule comes into effect for the remaining account balance.

Impact on Trusts

Trusts named as IRA beneficiaries also face new stipulations. The July 2024 regulations specify that if a trust is considered a “see-through” trust and all trust beneficiaries are EDBs, the trust can take distributions based on the life expectancy of the oldest beneficiary. For non-EDB beneficiaries, the 10-year Rule applies. This distinction helps ensure that trusts are administered in a way that complies with the updated distribution requirements.

Planning Considerations

These clarifications necessitate careful planning to manage the tax implications of inherited IRAs. Beneficiaries, especially non-spouse beneficiaries subject to the 10-year Rule, must strategize to avoid large tax bills. Spreading distributions over the 10-year period, rather than taking lump sums, can help manage income levels and potentially reduce the overall tax burden.

However, there may be instances where accelerating the payment is more beneficial than spreading it out. Also, consider you could use inherited funds to meet charitable commitments via a qualified charitable distribution. This is only available to those 70 ½ or older.

Roth IRAs

The 10-year Rule also applies to Roth IRAs, but distributions remain tax-free. Beneficiaries must still empty the account within ten years but without the tax impact associated with traditional IRAs. Nevertheless, careful planning is essential to ensure compliance and optimize the use of inherited Roth IRAs.

Conclusion

The July 19, 2024, IRS regulations provide much-needed clarity on the SECURE Act’s provisions for inherited IRAs. Beneficiaries must understand these rules to navigate the complexities of inherited retirement accounts effectively and avoid penalties.  

 

As always, contact your Dent Moses advisor if you have questions.