IRS Sets Rules on Minimum Annual Withdrawals for Inherited IRAs

The Internal Revenue Service (IRS) in Washington on March 25, 2024. (Madalina Vasiliu/The Epoch Times)

The Internal Revenue Service (IRS) announced final rules on Thursday detailing the amounts that must be pulled out yearly from inherited Individual Retirement Accounts (IRA).

An inherited IRA is opened when someone inherits an IRA plan and assets are moved from the original owner to the beneficiary’s account. Before the SECURE Act 2.0 was passed by Congress in 2022 and signed into law, beneficiaries could withdraw funds from an inherited account at their discretion. But the Act now requires that beneficiaries pull out all funds within 10 years of the original owner’s death.

On July 18, the IRS issued final rules on such withdrawals. The rule is related to the required minimum distributions (RMD), or the minimum amounts that IRA owners have to withdraw from their accounts each year when they reach a certain age.

If the original owner had begun RMDs before their death, the beneficiary of the inherited account will have to continue the withdrawals as well, the IRS stated.

The Treasury and the IRS reviewed public comments arguing against the move. The comments suggested that beneficiaries not be forced into making RMDs yearly. Instead, beneficiaries must be allowed to withdraw the funds as they wish within the-10 year period.

“However, Treasury and IRS determined that the final regulations should retain the provision,” the tax agency said.

The updated regulation does not apply to beneficiaries if the original account holder died before starting withdrawals. In this case, the person can withdraw the funds any time within the 10-year period.

The SECURE Act made the RMD rules applicable from Jan. 1, 2020. Not making the required RMD for any year can draw penalties. But since the rules created confusion among beneficiaries, the IRS had waived penalties from 2021 to 2024.

As such, beneficiaries of inherited accounts are expected to start withdrawals in 2025.

However, the 10-year window will still be calculated from 2021. So, if the original owner died in 2021, the beneficiary is expected to empty the account by 2031. The person only has to begin withdrawals from next year and won’t be penalized for not making RMDs between 2021 and 2024.

Complicated Regulations

The new IRS rules on RMD withdrawals have been criticized as too complicated. “Final Regs (regulations) come in at 260 pages. As far as Regs go, pretty beefy,” Jeff Levine, chief planning officer at Buckingham Wealth Partners, said in a July 18 X post.

“That said, at only 260 pages, there are almost certainly going to be a lot of things NOT covered by the Rgs that IRS will need to address in the future,” he added.

Financial expert Ben Henry-Moreland said in a LinkedIn post that, while there are a “TON of new rules” in the updated IRS regulations, none of them are game-changing from a financial planning perspective. The rules on RMD withdrawals are a “confirmation of what we already knew.”

However, the new rules do make “retirement accounts (even more) insanely complicated to deal with on a practical level,” he wrote.

“Just for one example, spousal beneficiaries now have 3 different options of how to treat their deceased spouse’s retirement account, each with its own RMD calculation (and associated pitfalls). It’s a choose your own adventure of tax planning, just what everyone wanted!”

The RMD final regulations come as a SECURE Act provision on emergency withdrawals went live earlier this year.

Usually, a person seeking to withdraw money from their retirement accounts like 401(k) before the age of 59 and a half would suffer a penalty of 10 percent for such early withdrawals.

However, SECURE 2.0 allowed people to make one withdrawal of up to $1,000 in a year to meet emergency expenses. This provision took effect in January 2024.

The withdrawn amount has to be repaid within three years. During these three years, no further withdrawals would be allowed unless the repayment is made in full.