Recent Changes to RMD Rules

The Rules governing Required Minimum Distributions (RMDs) have been a moving target over the past several years. The SECURE Act of 2019, SECURE Act 2.0, and several related IRS decisions made significant changes to the rules governing RMDs. One change is the age at which you must begin taking annual RMDs, which for many years was age 70-1/2. The table below summarizes the current ages to begin RMDs based on your birth date/year:

Your first RMD must be taken by April 1^st of the year following the year you reached the age listed above. In each year thereafter, your RMD must be taken by December 31^st of that year. So, if you delay your first RMD until April 1^st, then you will need to take two RMDs that year by December 31^st.

Another notable change related to IRA’s and qualified plans that are inherited by a beneficiary of the original account owner. A new category of beneficiary dubbed “Eligible Designated Beneficiary” was created, and includes the spouse of the account owner, minor children, disabled individuals, and persons less than 10 years younger than the account owner. For eligible designated beneficiaries (EDB’s), the rules governing RMDs from inherited accounts remained much the same as they were pre-SECURE Act, but big changes are in store for beneficiaries who do not fit into that category.

Account owners often name their adult children as their beneficiaries, and assuming the children are not disabled they won’t qualify as an EDB but will instead be a “Designated Beneficiary” (note the lack of the word ‘Eligible’). The SECURE Act of 2019 mandated that accounts inherited by Designated Beneficiaries be completely distributed by the end of the 10th year following the original account owner’s death, a requirement that has come to be known as the “10-year Rule.” About a year later the IRS further complicated matters when they issued Notice 2022-53 which states that if the original account owner had reached their “Required Beginning Date” (date at which RMDs are required to begin) prior to death, a Designated Beneficiary who inherited the account must take annual RMDs during years 1-9, and still fully liquidate the account by the 10th year.

You may wonder how all of this applies to inherited Roth IRA’s. Roth IRA account owners are not required to take RMDs during their lifetime, but the same does not apply to those who inherit Roth accounts. Eligible Designated Beneficiaries must take RMDs from Roth accounts following the same rules as for Traditional IRA accounts. The distributions are typically tax free, but still must be taken. But for Designated Beneficiaries, the rules are different. The 10-year Rule still applies, but no annual RMDs are required in years 1-9 regardless of the account owner’s age at death. Why are Roths treated differently? As is often the case, the devil is in the details. Since the original account owner never reached their Required Beginning Date prior to death (because there isn’t one for Roth accounts) then RMDs are not required in years 1-9. Therefore, the only requirement is that they empty the account by the end of year 10. This is the only case where a Designated Beneficiary has an advantage over an Eligible Designated Beneficiary. Unless faced with an immediate need for cash, a Roth beneficiary would be wise to wait until the end of year 10 before distributing the entire account balance in order to maximize tax-free growth.

If you have questions about how these changes may affect you, contact your trusted advisor at CPS Investment Advisors.