Our family has been amazed by the athleticism currently on display in the 2024 Summer Olympic Games. While the precise movements differ between events, one attribute common among them is that their legs or arms (or both) move much quicker than mine. To win a medal, an athlete must move at least as rapidly as their Olympic competitors.
On July 19th of this year, the IRS released final regulations on the taxation of inherited individual retirement accounts and employer plans (“Inherited IRA Accounts.”) These regulations were intended to clarify the taxation of Inherited IRA Accounts following the 2019 Secure Act. In these regulations, the IRS applies a principle analogous to Olympic competition—Inherited IRA Accounts must be withdrawn and taxed following death at least as rapidly as if the original account owner were still alive.
In this month’s update, I apply the “at least as rapidly” principle to three hypotheticals involving the receipt of Inherited IRAs.1
- Death Before Retirement Date
Situation: Account owner (whom we’ll call “Amy”) dies in 2024 at age 60, leaving her account assets to her two adult daughters, Brita and Cari.
Rule: Brita and Cari can withdraw inherited IRA accounts at any time, but are not required to withdrawal any annual amounts (that is, no required minimum distributions, or “RMDs”) until the tenth anniversary of Amy’s death. Brita and Cari must withdraw all remaining inherited IRA assets by December 31, 2034.
Explanation: The required beginning date (“RBD”) for starting withdrawals is now age 73.2 If Amy were still living, she would not be required to take withdrawals until reaching the RBD of age 73. In this case, by reason of the ten-year rule, Brita and Cari will be required to withdraw all Inherited IRA Account assets by 2034 far more rapidly than Amy had Amy then been living.
- Death After Retirement Date
Situation: Amy dies in 2024 at age 80, leaving her account assets to her two daughters, Brita (age 54 in 2024) and Cari (age 49 in 2024).
Rule: Brita and Cari must take RMDs distributions beginning in 2025, the year following Amy’s death. Brita must withdraw at least 3.12% of the account balance in 2025, and Cari must withdraw at least 2.8% of the account balance in 2025.3 Both children would be required to withdraw an RMD amount in each of the subsequent 9 years, and then 100% of remaining account assets by December 31, 2035.
Explanation: The new regulations require that the designated beneficiaries take RMDs beginning in the year following death based on the beneficiary’s life expectancy. Until the tenth anniversary of the death, the beneficiaries are taking RMDs slightly less rapidly than if their deceased parent were then living based on the discrepancies in life expectancy. However, the beneficiaries are taking RMDs far more rapidly by the 10th anniversary date, when all remaining assets must be distributed.
- Distribution of Inherited IRA Following Death
Situation: At the time of her death in 2024, Amy (age 80) was the owner of an inherited IRA she had previously inherited from her mother when her mother died in 2005. At the time of Amy’s death, Amy was taking RMDs from this inherited IRA account based on Amy’s life expectancy. Amy directed this Inherited IRA account at her death to her two children, Brita and Cari.
Rule: Both Brita and Cari must take RMDs in 2025 of 8.9% of their share of the Inherited IRA account, and continue taking RMDs in each year of the subsequent 9 years, and then 100% of remaining retirement account assets by December 31, 2025.4
Explanation: Brita and Cari must both take RMDs in years 2025 through 2034 based on Amy’s (older) life expectancy, then withdraw all remaining assets by December 31, 2035. Brita and Cari are taking distributions from the Inherited IRA as rapidly in the first 9 years as their mother, than far more rapidly by the 10th anniversary date.
While our family has had an enjoyable summer, it seems that it has elapsed at least as rapidly as previous summers! Whether you have questions about inherited retirement accounts or have other estate planning-related questions, my colleagues and I at Veritage Law would be glad to speak with you or your clients.
1 Beneficiaries who qualify as “Eligible Beneficiaries” are permitted to “stretch” RMDs based on the beneficiary’s own life expectancy. In addition to a surviving spouse, “Eligible Beneficiaries” include minor children, disabled and chronically ill beneficiaries, and named beneficiaries who are less than 10 years younger than the account owner.
2 The Inherited IRA must be fully distributed by December 31st of the year that contains the 10th anniversary of the death of the Account Owner. Treasure Regulations. 1.401(a)(9)-5(d)(2).
3 Based on Brita being age 55 in 2025, and Cari being age 50 in 20205 based on the Single Life Life Expectancy table. If Brita is age 55 in 2025, her factor is 1/31.6. If Cari is age 50 in 2025, her factor is 1/36.2. https://www.fidelity.com/building-savings/learn-about-iras/irs-single-life-expectancy-table
4 If Amy was age 80 in 2025, her factor was 1/11.2, which is now applicable to Brita and Cari, even though Brita and Cari have longer life expectancy. By reason of the fact that Amy was already taking RMDs based on her (shorter) life expectancy, the factor is based on Amy’s life expectancy.