These regulations answer some key questions about the latest de minimis management rules.
The federal government encourages retirement saving by offering a tax break to anyone who contributes to certain retirement accounts like a 401(k) or IRA. If you save money in a traditional, tax-deferred retirement account, you can deduct the amount you put in on your tax return this year. That gives you more money to invest now.
But eventually, Uncle Sam wants his tax returns. And you can’t defer taxes forever because the government imposes required minimum distributions. Seniors must begin withdrawing money from tax-deferred retirement accounts starting at age 70, and some inherited IRAs may be subject to minimum distribution rules. Every time you withdraw money from one of these accounts, you’ll have to pay the taxes you’ve been deferring for years.
The penalties for not distributing the required funds can be very high. You could owe up to 25% of the amount you were supposed to withdraw if you don’t do so in a timely manner. And you still have to make the withdrawal and pay taxes on it anyway.
Recent legislation has made several changes to the RMD rules, and the IRS issued final regulations on how to implement the updated legislation in July, clarifying several key points. Here are three things everyone should know.
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1. You must continue to make required minimum distributions to your inherited IRA.
If you inherited an IRA from someone who died after December 31, 2019, you may be subject to required minimum distributions on that account.
The Security Act changed the rules for inherited IRAs. Instead of being able to stretch withdrawals over your lifetime, you now only get 10 years from newly inherited IRAs to deplete the account. There are exceptions for spouses, minor children, beneficiaries under 10 years of the IRA owner, and disabled or chronically ill beneficiaries.
It wasn’t clear as written whether someone who inherits an IRA subject to the 10-year rule would also have to take required minimum distributions in years one through nine. The IRS waived the requirement from 2021 to 2024 but said it would begin imposing required minimum distributions on inherited IRAs starting in 2025. Anyone who inherits an IRA from an owner who was already taking required minimum distributions will need to continue taking annual distributions.
While the minimum withdrawal rule is not retroactive, the 10-year rule still applies to anyone who inherited an IRA in or after 2020. This means that some beneficiaries will need to fully deplete the inherited account by 2030 after making minimum withdrawals between 2025 and 2029.
Since beneficiaries are required to drain the account within 10 years, it often makes sense to withdraw some amount each year to reduce the overall tax burden. However, IRS regulations reduce the flexibility that beneficiaries may have previously enjoyed.
2. Older beneficiaries may receive amounts less than the minimum distribution.
If you inherit an IRA from someone younger than you who has already started taking required minimum distributions, you will have to continue taking required minimum distributions from the newly inherited IRA. This can add an additional tax burden to your inheritance, since you likely have a required minimum distribution that you can take from your own accounts.
New IRS regulations provide some relief for older beneficiaries. Instead of taking a required minimum distribution based on your life expectancy, you may be able to take a required minimum distribution based on the life expectancy of the original owner. This results in a smaller distribution from the inherited account.
Additionally, since you are older than the original owner, you are not subject to the 10-year rule mentioned above. Therefore, you can keep your withdrawals at the required minimum throughout your entire life. However, you will likely pass the tax burden on to your beneficiaries, who may be subject to higher levels of the required minimum withdrawals and the 10-year rule.
3. Anyone born in 1959 should plan to start RMDs at age 73.
The Secure 2.0 Act raised the minimum withdrawal age from 72 to 73 starting in 2023 and then raised it again to 75 in 2033. However, this created an interesting problem for anyone born in 1959. Since they would be 73 in 2032, they would have to take their first minimum withdrawal by April 2033. But after that, they would be 74 in 2033, which is less than the minimum withdrawal age. So, should 1959 babies start taking their minimum withdrawal at 73 or 75?
The IRS has proposed a rule to address a flaw in the Secure 2.0 rule, which would make the minimum required distribution age 73. The table below indicates the minimum required distribution age based on your year of birth if the proposed rule goes into effect.
| Year of birth | RMD age |
|---|---|
| Before 1949 | 70 1/2 |
| 1949-1950 | 72 |
| 1951-1959 | 73 |
| 1960 or later | 75 |
Data source: IRS.
Keep in mind that you can delay your first required minimum distribution until April 1 of the following year. However, your next distribution must be taken by December 31 of that year, which means that delaying your first required minimum distribution would result in two distributions in one year. It often makes sense to take your first distribution in the year you reach required minimum distribution age to reduce your overall tax liability.
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