IRS Finalizes Required Minimum Distribution Rules for Non-Spouse Beneficiaries

By Ben Dolan, CFP®

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Since its passing at the end of December 2019, the SECURE Act left many non-spouse retirement account beneficiaries in limbo regarding the taking of Required Minimum Distributions. Also known as RMDs, Required Minimum Distributions necessitate the outflow of retirement account assets from tax-deferred accounts (and other types of accounts, but today we’ll focus solely on tax-deferred) so the government can collect tax revenue.

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Prior to the passing of the SECURE Act, non-spouse IRA beneficiaries were able to “stretch” RMDs over their lifetime per an IRS lifetime table. The ability to stretch RMDs over the course of a lifetime allowed the beneficiary to minimize the tax burden associated with smaller distributions of pre-tax assets. With the introduction of the SECURE Act, for beneficiaries of decedent’s accounts passing in 2020 or thereafter, a new 10-Year Rule was instituted (note, beneficiaries of accounts from a decedent that passed prior to 2020 and elected to “stretch” the RMDs can continue to do so…they are grandfathered in).

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Unfortunately, the rules regarding how to apply this new 10-Year Rule were opaque. Many just assumed that if an inherited IRA was depleted within a 10-year period following the decedent’s death, then they were satisfying the new rule. Confusion ensued, until recently. 

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On July 19^th, the IRS released final rules regarding RMDs for non-spouse IRA beneficiaries. Here’s what you need to know:

• These rules apply to “Non-Eligible Designated Beneficiaries” (NEDB) defined as a person who is named as a beneficiary in an IRA but doesn't fall into an eligible category. NEDBs are usually non-spouse beneficiaries who are more than 10 years younger than the deceased account owner and aren't minor children.
• As a NEDB for an IRA with a decedent that died in 2020 or thereafter, do I have to take annual RMDs? Maybe. The new rule states that if you inherit an IRA from an owner who died on or after their Required Beginning Date (the date by which they were supposed to start RMDs based on their age), then yes, you have to take an annual RMD over a 10-year period until the account is depleted. Note, if you fall into this category and have not started annual RMDs, know that the IRS has waived the need to take RMDs for 2021, 2022, 2023, and 2024 given the confusion caused by the new regulation.‍
• If the decedent passed prior to reaching their Required Beginning Date, you, as the NEDB, DO NOT have to take an annual RMD. However, the account must be depleted by the end of the 10^th year following the decedent’s death. This provides you with a little more flexibility.

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The regulation touches on other areas that we’ll feature in upcoming posts, so stay tuned for more on this topic. For now, know that we look forward to helping you plan for gifts you’ll receive and those you plan to give while taking these new regulations into consideration.