Important Time Sensitive Notice in 2025 regarding IRA inheritance from U.S.
Required Minimum Distributions (“RMDs”) are required on many inherited IRAs under the Secure Act effective for calendar year 2025. New final rules clarify a major point on inherited IRAs and the beneficiaries Required Minimum Distributions (“RMDs”).
In long-awaited final rules, the IRS finally resolved the 10-year rule for inherited individual retirement accounts (IRAs). The new rules clarify the requirements for beneficiaries based on the passage of the original SECURE Act over five years ago.
The big question, now answered, had been whether non-spouse beneficiaries had to take annual required RMDs during the 10 years following the original account holder’s death, or if they could wait and withdraw the entire amount at the end of the decade.
In the final rules, the IRS confirms that most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the tenth year.
This applies to cases where the original account holder was required to start taking RMDs before they passed away.
However, the regulations do provide some flexibility regarding annual distributions.
- If the original account holder passed away before reaching their RMD age, beneficiaries have more leeway in their withdrawals within the 10-year window. Be aware the account must still be emptied by the end of the 10 years.
It is also important to note that rules vary for certain beneficiaries.
For example, the following “eligible designated beneficiaries” are generally exempt from the 10-year rule:
- Surviving spouses/Minor children (under age 21)/Disabled or chronically ill individuals/Beneficiaries not more than 10 years younger than the deceased
Penalty relief for missed RMDs from 2021-2024
The IRS knows the transition has been confusing and has provided a grace period for 2021 through 2024, affected beneficiaries who didn’t take RMDs during those years.
The final regulations also extend the applicability date in the proposed regulations from distribution calendar years beginning on or after Jan. 1, 2022, to distribution calendar years beginning on or after Jan. 1, 2025. (see IRS Notices 2022-53, 2023-54, and 2024-35). Under this relief, an inherited account holder who failed to take an annual RMD in those years in accordance with the 2022 proposed regulations would not be assessed for an excise tax under Section 4974 for failing to do so.
Remember that RMD income and timing can have significant tax consequences and penalties. Please contact our retirement specialist, Lisa Alter, if you have any questions or need clarification about this issue.
Her number is 02-568-4637 or email her at: lisa@ardcpa.com
Tax and Legal Disclaimer: The materials provided in this article and any comments or information provided herein are for educational /discussion purposes only, and nothing conveyed or provided should be considered legal, accounting or tax advice for the U.S. or Israel. Please contact your U.S. and/or Israeli tax attorney or accountant with any specific questions you have related to the information provided that are of a legal, accounting or tax nature. Please be aware that your Israeli taxes may be affected by your distributions from any U.S. IRA.