Whoops…they did it again! On April 16, the IRS issued Notice 2024-35, further kicking the can down the road regarding whether certain beneficiaries of retirement plans are required to take annual distributions from Inherited Retirement Accounts. This is in addition to having to fully liquidate retirement plans within 10 years following the original owner’s year of death.

Background

The landscape of retirement planning underwent significant changes with the introduction of the SECURE Act (and subsequently SECURE Act 2.0), which brought about a series of adjustments to the rules governing inherited retirement accounts. One pivotal change was the modification of the Required Minimum Distribution (RMD) rules for beneficiaries. Under the original SECURE Act, most non-spouse beneficiaries were required to withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death. This rule replaced the previous provision that allowed beneficiaries to stretch out distributions over their lifetime, significantly altering the tax planning strategies for inherited IRAs and other retirement accounts.

Kicking the Can Down the Road

However, the IRS has yet to issue final regulations on whether beneficiaries must take annual RMDs during this 10-year period. This has created uncertainty for beneficiaries and their advisors, whom they rely on to help interpret the IRS rulings.

The IRS’s first mistake was waiting too long to issue proposed regulations. SECURE Act 1.0 was signed into law on December 20, 2019. Many of the changes made by the new law, in particular the changes to required minimum distributions, went into effect for people dying after December 31, 2019, just 12 days after the law was signed.

The IRS did not issue its first set of proposed regulations until February 23, 2022, well over two years after the law was signed. The proposed regulations included requiring beneficiaries to take annual minimum distributions from the inherited retirement account if the original account owner had been taking RMDs at the time of their death.

This surprised almost everyone. Nobody had contemplated that the regulations would require this. Eight months later, on October 7, 2022, the IRS decided to waive the penalty for failing to take an RMD for tax years 2021 and 2022. Interestingly, the Notice waived the penalty but not the RMD itself. It’s confusing, at best.

Two additional times, including this last time, the IRS waived the penalty for failure to take an RMD (for the 2023 and 2024 tax years).

The delay in finalizing the regulations may stem from the IRS’s acknowledgment of the challenges that the 10-year rule presents, especially when coupled with the requirement for annual distributions. The SECURE Act’s intention to simplify the retirement savings landscape seems at odds with the complexity these interim rules have introduced.

This most recent Notice indicates that final regulations are coming (Hallelujah!). The belief is that new rules will apply starting in 2025 and will likely incorporate changes from the original SECURE Act and SECURE Act 2.0. These regulations hopefully will clarify the RMD requirements for beneficiaries, including the potential obligation for annual distributions within the 10-year period.

The requirement to liquidate the account within 10 years still stands for those who have inherited retirement accounts. Many seem to cheer each time the IRS punts to the following year. Still, for those beneficiaries who inherited their IRA in 2020, only six years remain before they have to liquidate the entire account and pay income tax for accounts other than Roth IRAs. At some point, regardless of whether the RMD is waived, they may want to take a distribution from the account. Waiting until the last few years could put you in a rather large tax bracket, especially if the tax brackets sunset back to what they were pre-TCJA (Tax Cuts and Jobs Act).

In conclusion, the SECURE Act 1.0 and 2.0 have reshaped the approach to inherited retirement accounts, with the RMD rules being a focal point of change and uncertainty. As the IRS continues to delay issuing final regulations, keeping track of any proposed or implemented changes is important so that when final regulations are issued, you are ready to do the correct thing. It is crucial to stay involved and keep abreast of developments to manage the impact on retirement and estate planning strategies effectively.

As always, our team of advisors here at EKS Associates is happy to answer any questions you may have. Don’t hesitate to contact us.