If you inherited a retirement account, the IRS may have suspended your RMD deadlines.
In Notice 2024-35, the IRS has deferred annual distribution requirements for beneficiaries of pre-tax retirement plans.The tax agency issued a similar statement in 2022 and 2023. The result of this notice is that beneficiaries of retirement plans like a 401(k) or IRA must still take a full distribution within 10 years of receiving the account, but do not have to take an annual distribution in 2024.
Readers should note that reporting elsewhere has framed this as a notice related to employer-sponsored retirement plans. This is accurate, however it applies to IRA plans as well.
Here’s what you need to know. You can also get matched with a fiduciary financial advisor who can help you navigate the RMD landscape and retirement planning.
The Ten Year Rule and RMDs
A required minimum distribution, or “RMD,” is a rule that applies to all pre-tax retirement accounts. Starting when you turn 73, every year you must take a minimum amount from each pre-tax retirement account that you own. The amount is based on the value of your portfolio and your age.
Beneficiaries who inherit a retirement account have a distribution requirement established in the SECURE Act called the Ten Year Rule. Under this rule, if the owner of a retirement account dies in 2020 or later the beneficiaries have 10 years to withdraw all assets. This rule only sets a maximum time frame. The beneficiary of the account can withdraw as much or as little as they like, at any time, so long as they withdraw all assets by the end of the 10th year. Failure to do so triggers the same tax excise tax requirement as RMD violations.
This updated a similar rule known as the Five Year Rule. Under the Five Year Rule, if the owner of a retirement account died in 2019 or earlier, the beneficiaries have five years to withdraw all assets. That rule will functionally expire in 2025, as this is when the last eligible accounts must be emptied.
The SECURE Act carved out an exception to the 10 Year Rule for spouses, minor children and a few other possible heirs collectively known as “eligible designated beneficiaries.”
Each person’s financial circ*mstances and goals are different. For professional advice on withdrawal strategies, you can talk to a fiduciary financial advisor.
The Annual Distribution Requirement
In 2022, the IRS announced rulemaking to update the 10 Year Rule. This new rule would apply annual RMD requirements to beneficiaries who inherit a plan that had reached its required beginning date. This would not apply to eligible designated beneficiaries, who have their own required minimum distributions over the course of their lifetime.
In other words, if the original owner of a retirement plan dies after turning 73, the beneficiaries of that plan would have required minimum distributions in years One through Nine and must withdraw all remaining assets by the end of year Ten. This rule would apply to both employer-sponsored plans and IRAs.
If the original owner of the plan died before turning 73, a beneficiary will not need to take annual distributions. Only the Ten Year Rule will apply.
This proposed rulemaking created some confusion. In addition to potentially conflicting with elements of the Five Year Rule, some IRS statements implied that the annual distribution rule merely interprets the SECURE Act as written. If so, it would mean that an annual distribution requirement already applies, and taxpayers may be unwittingly violating it.
The IRS has received significant pushback to its proposed rulemaking, as well as confusion from taxpayers unsure of their current obligations.
Relief Notices
To address the confusion and objections around its annual requirement, in 2022 and 2023 the IRS issued notices delaying any annual distribution requirements for pre-tax portfolio beneficiaries. Under these notices, a beneficiary of a pre-tax retirement plan does not have to take annual distributions.
The IRS has issued a similar notice for 2024, Notice 2024-35.As in previous years, this notice suspends any annual distribution requirement for beneficiaries of a pre-tax retirement plan in 2024. The notice applies to both employer-sponsored plans and IRA accounts. This does not toll the ten year withdrawal period for beneficiaries under the Ten Year Rule.
The IRS has announced that it intends to issue final rules and guidance on this issue by January 1, 2025.
A financial advisor can help you navigate RMD rule changes and more. Get matched with up to three fiduciary advisors for free.
The Bottom Line
Under a recently issued IRS notice, beneficiaries of tax-advantaged retirement accounts do not have to take annual withdrawals. While the Five- and Ten-Year rules still apply, annual minimum distributions are currently suspended pending further rulemaking.
More Resources
- When it comes to inheriting a retirement account, your taxes can get very complicated very quickly. So let’s take a minute to talk about how you can manage your taxes if you have inherited something like an IRA.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. You can also read SmartAsset reviews.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest.Compare savings accounts from these banks.
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