The SECURE Act became law on January 1, 2020. One of the provisions passed as part of the SECURE Act was regulations on required minimum distributions (RMDs) for inherited IRAs and qualified retirement plans (including the Thrift Savings Plan). The major change on RMDs coming out of the SECURE Act is that effective January 1, 2020, most non-spousal beneficiaries of traditional IRAs lost their ability to “stretch” mandatory withdrawals over their life expectancy. Instead, most non-spousal beneficiaries became subject to a mandatory 10-year payout rule.
The IRS has released almost 300 pages of regulations on RMDs for IRAs and qualified retirement plans in two parts. The first part was the final SECURE Act Regulations 7-18-24 which covered 200 pages. The second part was the proposed SECURE 2.0 Regulations 7-18-24 which ran another 36 pages.
In issuing proposed regulations resulting from SECURE Act’s passage, the IRS took the controversial position that if a traditional IRA owner died on or after his required beginning date (RBD) (the date for starting traditional IRA RMDs), then annual RMD payments must continue to the beneficiary during the 10-year mandatory payout period. In the newly released final regulations which came out on July 18,2024, the IRS was more determined in its position that these annual RMDs are required and must be taken starting in 2025. However, the IRS decided to waive penalties for annual RMDs of inherited traditional IRAs that were not taken by non-spousal beneficiaries during the years 2021, 2022, 2023 and 2024.
This column presents an example of a traditional IRA beneficiary subject to the 10-year payout rule in which the deceased traditional IRA owner was past his or her required beginning date and therefore had started their traditional IRA RMDs. Here is the example:
Rosalie inherited a traditional IRA from her mother, Susan, who died at age 86 on July 2, 2020. Under the SECURE Act, Rosalie is subject to the mandatory inherited IRA 10-year payout rule. Rosalie must empty the inherited traditional IRA account by December 31, 2030. The newly issued IRS regulations (July 18, 2024) also require Rosalie to take annual RMDs based on her single life expectancy in years 1 through 9 of the 10-year payout period. This is because Rosalie’s mother was older than her RBD of age 70.5 and was taking her traditional IRA RMDs at the time she died in July 2020.
Rosalie did not take any inherited IRA RMDs during the years 2021, 2022, 2023 and has decided not to take an inherited IRA RMD during 2024. Due to the IRS waiver of the penalties for missed RMDs in years 2021 through 2024, Rosalie will not be subject to any penalties. However, beginning in 2025, Rosalie must take an annual RMD for the years 2025 -2029 from the inherited traditional IRA. Rosalie is required to withdraw the entire balance of her inherited IRA by December 31, 2030 (the end of the 10-year period following her mother Susan’s death).
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Calculation of Roaslie’s annual RMDs for the Years 2025 -2029
Fact 1: Rosalie was age 60 in 2020, the year her mother Susan died.
Fact 2: Rosalie must take RMDs each year, starting in the year 2021 and ending in the year 2029.
Fact 3: Each year Rosalie’s RMD is based on the inherited IRA balance as of December 31 of the previous year and divided by a single life expectancy factor (IRS Single Life Table which can be found at https://www.irs.gov/pub/irs-pdf/p590b.pdf, pages 48-49 ), starting with the year 2021. The single life expectancy for a 61-year-old (Rosalie’s age in 2021, the year following the death of her mother Susan) is 26.2 years and is used for every subsequent year, up to the year 2029.
Subtracting 1.0 for each subsequent year results in 22.2-year life expectancy for Rosalie’s 2025 RMD. Rosalie’s 2025 inherited IRA would be calculated as:
Inherited IRA account balance as of 12/31/2024/22.2
Rosalie’s 2026 Inherited IRA RMD would be calculated as:
Inherited IRA account balance as of 12/31/2025/21.2
Rosalie’s 2027 Inherited IRA RMD would be calculated as:
Inherited IRA account balance as of 12/31/2026/20.2
Rosalie’s 2028 Inherited IRA RMD would be calculated as:
Inherited IRA account balance as of 12/31/2027/19.2
Rosalie’s 2029 Inherited IRA RMD would be calculated as:
Inheirted IRA account balance as of 12/31/2028/18.2
During 2030, Rosalie must withdraw all of her remaining inherited IRA no later than December 31, 2030.
The IRS position requiring RMDs for those nonspousal beneficiaries of traditional IRA owners who died after their required beginning date has been widely criticized. However, it is important to note that many inherited IRA beneficiaries subject to the 10-year rule can voluntarily take out more than the annual RMD over the 10-year period. This is especially encouraged during 2024 and 2025 which are the last year of the low individual marginal tax rates per the Tax Cuts and Jobs Act of 2017 (TJCA). The TCJA tax cuts are due to expire on December 31,2025 unless Congress renews TCJA. If Congress does not renew TCJA, then individual tax rates will revert back to the higher 2017 federal individual tax rates, inflation adjusted.
What Should Inherited IRA Beneficiaries Do During the Next 5 to 10 Years to Minimize Their Tax Liabilities?
When it comes to good tax planning, the key is for individuals to always pay taxes at the lowest tax rates, taking maximum advantage of low tax brackets every year. For example, during 2024 most federal employees are in a 22 or 24 federal tax bracket. The 22 and 24 federal tax brackets are a result of the passage of the TCJA. TCJA lowered individual tax rates to the lowest level they have been. However, TCJA lowered tax rates only temporarily, until December 31, 2025. Unless Congress renews TCJA, individual tax rates will revert to what they were in 2017.
If inherited traditional IRA beneficiaries do not take advantage of the lower 22 and 24 percent tax brackets during 2024 and 2025, they are lost forever.
Those non-spousal beneficiaries of inherited traditional IRAs whose owners died after December 31,2019 and subject to the 10-year RMD rule are encouraged not to take minimum required distributions. Rather, they should be taking maximum advantage of the current low individual federal tax brackets. Taking more each year (especially during 2024 and 2025) and spreading the income over the next 8 to 10 years will smooth out the taxable income, resulting in lower federal and state tax liabilities in most cases. This is especially true for beneficiaries like Rosalie whose mother died in 2020 and, because of the delayed effective date of annual RMD rule for nonspousal beneficiaries, will be required to take five annual RMDs (2025 through 2029) instead of nine (2021 through 2029).
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.