Final Rules for Inherited IRA Owners in a Post-SECURE Act World

Final Rules for Inherited IRA Owners in a Post-SECURE Act World

Between now and 2045, Cerulli Associates estimates that more than $80 trillion in wealth will be transferred from the Baby Boomer generation to their heirs. It is understandable to assume some of those assets will be in the form of retirement accounts such as IRAs, Roth IRAs and 401(k)s. With the enactment of the SECURE Act 1.0 in 2019 and subsequent SECURE Act 2.0 in 2022, inheritors of retirement accounts have endured multiple years of limbo and confusion while the IRS sorted out how and when it would implement the new rules regarding mandatory distribution timing. With the arrival of 2025, we now know how to proceed forward, albeit cautiously.

In July 2024, the IRS released its “final regulations” on the matter in the form of Notice 2024-35 which clarified how inherited IRA account owners would be subjected to the new 10-year distribution rule. And fair warning, the end result is still a confusing landscape. What is clear is that the SECURE Act rules only apply when the original retirement account owner died in 2020 or later. Any inherited IRAs resulting from original owner deaths in 2019 or prior are still subject to the old rules where required minimum distributions (RMDs) are stretched over the beneficiary’s lifetime.

For retirement accounts inherited in 2020 and later, there are two primary ways RMDs can be treated: stretched over the beneficiary’s lifetime and/or fully distributed by the end of the 10th year after the original owner’s death, often referred to as the “10-Year Rule”. If you are a spouse beneficiary, then special rules may also apply. Generally, surviving spouses retain the ability to treat their spouse’s IRA as their own. For the purposes of this article, below are the more common scenarios our clients may face:

Scenario 1: IRA owner dies in 2020 with his adult child listed as the sole beneficiary. The original owner was already subject to RMDs himself, therefore his adult child must adhere to BOTH the stretch rule and the 10-year distribution rule. This means they must at least take the smaller required minimum distributions in years 1-9 (though they can choose to take more) and fully distribute the inherited IRA by the end of year 10. In this scenario, that is by the end of 2030.

Scenario 2: IRA owner dies in 2020 with her adult child listed as the sole beneficiary. The original owner died prior to being subject to RMDs herself, therefore her adult child will only be required to abide by the 10-year rule. This means no required minimum distributions in years 1-9. The adult child beneficiary must fully distribute their Inherited IRA by the end of year 10, or 2030 in this example.

Scenario 3: IRA owner dies in 2020 with an eligible designated beneficiary (EDB) listed. EDBs are defined as surviving spouses, disabled persons, chronically ill persons, persons not more than 10 years younger than the original owner, minor children, and some see-through trusts. The original owner was already subject to RMDs himself, therefore his beneficiary will be able to stretch the RMDs over their lifetime.

Scenario 4: IRA owner dies in 2020 with an eligible designated beneficiary listed. The original owner died prior to being subject to RMDs herself, therefore her beneficiary will be required to adhere to BOTH the stretch rule and the 10-year distribution rule.

As evidenced above, these now final regulations that were supposed to clear up the confusion are still very confusing! That is why we at Sand Hill believe it is necessary to discuss each client’s specific situation well in advance of December 31st when RMDs are potentially due. 2025 is the first year these final regulations are now in effect—with no expectation that there will be a waiver of the under-distribution penalty as there was in 2021 through 2024—so the planning throughout this year is of utmost importance.

Sources: Cerulli Associates, IRS, Kitces.com

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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