Big News from the IRS!

Published just today, the IRS has finally made a decision about Required Minimum Distributions for beneficiaries of IRAs and, big surprise, it's not to your advantage.

Since the SECURE Act of 2019, when the IRS pulled the carpet out from underneath decades of standard practice and instituted a new rule that most non-spousal beneficiaries of IRAs must withdraw the full balance of the account in 10 years, there has been confusion and conflicting guidance on whether or not those beneficiaries had to take distributions each year or if they could leave the account untouched for the 10 year period and take it all out in the final year.

Effective September 17th of 2024, the rules state that an "Ineligible Beneficiary" must take RMDs "at least as rapidly" as the original owner of the IRA had been and must empty the account in full by the end of the 10 year period. If the original IRA owner had not begun taking RMDs, the beneficiary does not need to take RMDs but still must withdraw the entire balance by the end of the 10th year. It is important to understand what an "Ineligible Beneficiary" is. It may help to think about it in this way; an Ineligible Beneficiary is any beneficiary who is ineligible to extend the distribution beyond that of the 10 year window. Who might this be you ask? The most common example of this will be adult children inheriting retirement plan assets from parents. So in plain terms this means that if required distributions had begun prior to the death of the account owner, they must continue.

Conversely, "Eligible Beneficiaries" will most commonly be spouses. A spouse has been able to effectively convert an inherited IRA into their own IRA and either begin or continue to take distributions based on their own age rather than that of their now-deceased spouse. Other eligible beneficiaries include disabled or chronically ill beneficiaries and a partial exception for heirs who are under age 21. For them, the 10 year window begins at age 21 and the account must be emptied by the end of a 10 year window that begins on their 21st birthday.

More analysis will be needed to fully understand the implication of this rule on non-person beneficiaries such as trusts, estates, annuities, and other non-living beneficiary types. Some trusts will be "see-through" which means the beneficiaries of the trust will determine how the distributions are calculated, others won't be as clear.

The purpose of the rule is simple- to raise tax revenue. By forcing beneficiaries to take annual withdrawals during the 10 year window it accelerates the receipt of tax revenue.

Whenever the IRS increases tax liabilities, tax payers will seek a way to defer or eliminate it. Thankfully, for people over 70.5 years old, the Qualified Charitable Distribution still applies to inherited IRAs. The QCD limit is $105,000 in 2024 so anyone who will now be subject to taking required distributions from an inherited IRA will be looking for ways to soften the blow of increased income tax burdens. Charitable Giving comes from the heart, so this issue alone is not going to make someone more charitably inclined, but when it comes to identifying the right asset from which a person makes their charitable gifts, this new rule further elevates IRAs and other retirement plan assets as prime sources of capital for individuals to consider when deciding when and how to make a charitable gift.