OceanFirst Financial Corporation
09/20/2024 | Press release | Archived content
Final Regulations for RMDs
September 20, 2024
The SECURE Act of 2019 eliminated the "stretch IRA," which had become a hot estate planning strategy for providing lifetime financial support to a young beneficiary. Under the earlier law, distributions from an inherited IRA could be spread over the beneficiary's lifetime. For young beneficiaries, the RMDs might be small enough that the inherited IRA would continue to grow handsomely.
Now only "eligible designated beneficiaries," as defined in the new law, are allowed to stretch the IRA payouts over their life expectancies. In all other cases, the IRA must be distributed in ten years.
There are five categories of those who can continue to have lifetime IRA RMDs:
Surviving spouses. The surviving spouse may use the life expectancy tables to take RMDs over his or her lifetime. A surviving spouse continues to have the option of making an inherited IRA his or her own.
Minor children of account owner. Until they reach the age of majority, the RMDs for minor children may be determined from the actuarial tables. Once they reach the age of majority, the ten-year rule kicks in. Note that the minor must be the account owner's child, not simply a minor. This tax treatment is not available to grandchildren, nieces or nephews.
Disabled beneficiaries. If the designated beneficiary is disabled within the meaning of IRC §72(m)(7), RMDs may be stretched over the lifetime. Entitlement to Social Security disability benefits may be a litmus test for eligibility.
Chronically ill beneficiaries. A chronically ill designated beneficiary, as that condition is defined in IRC §7702B(c)(2), may stretch the payouts over his or her lifetime.
Less than ten years younger than the account owner. Life expectancy may be used if the heir is less than ten years younger than the account owner, such as a sibling. However, a blood relationship is not required.
Financial planners debated how to handle distributions for those in the ten-year category. Should they be deferred until the tenth year, for maximum tax-deferred buildup? Or should a program of taking 10% each year for ten years be better, as it avoids pushing the beneficiary into a higher tax bracket?
In Proposed Regulations, the IRS said that not every beneficiary has that option. If the account owner died after his or her required beginning date, the beneficiary would have to take a required minimum distribution in each of the ten years.
That proposal caught planners and financial institutions by surprise, so the IRS responded by waiving penalties for failure to take an RMD from certain inherited IRAs in 2021, and again in 2022, 2023 and 2024. Commenters asked the IRS to change course, but in Final Regulations, issued in July, the Service confirmed the earlier rule.