RMDs and the 10-Year Rule: An IRS Curveball

RMDs and the 10-Year Rule: An IRS Curveball

This week’s reader question: Can you shed some light on the IRS’ confusing new rule for IRA inheritance?

You’re not the only one caught looking after the IRS threw its latest curveball. Their recent guidance was a surprise, and we’ve seen conflicting interpretations in the news and on social media.

Here’s what we know: The SECURE Act of 2019 put an end to the “Stretch IRA,” whereby individual retirement accounts could be passed along from one generation to the next, earning tax-free growth. Instead, the SECURE Act implemented a “10-year rule” requiring the entire IRA account to be disbursed by the end of the 10th year following the original IRA owner’s death.

Recently, the IRS took the 10-year rule nine steps further. According to their March 2022 interpretation, the taxman seems to be saying that, if the original IRA owner died before they were required to begin taking required minimum distributions (RMDs; their 72nd birthday), then certain beneficiaries must empty the account in 10 years and take annual RMDs in years one through nine.

Manager of Financial Planning Andrew Busa and quote saying "The IRS interpretation and its caveats are a mouthful. Yet we’d note that this guidance isn’t codified yet; more modifications may come before these rules are the law of the land."

There are a few important caveats. First, the 10-year rule does not apply to eligible designated beneficiaries, including surviving spouses and children under the age of 21, as well as beneficiaries who are disabled, chronically ill or “not more than 10 years younger than the participant.”

The IRS interpretation and its caveats are a mouthful. Yet we’d note that this guidance isn’t codified yet; more modifications may come before these rules are the law of the land. For now, we’re advising beneficiaries to wait to make final decisions about the timing of distributions until the regulations are finalized—likely later this year. We’ll be keeping an eye on this for you.

In the meantime, reach out to your wealth management team with specific questions or to discuss your distribution strategy within the context of your overall financial plan.

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