Because proposed regulations on the 10-year rule are still under consideration, heirs will be allowed to skip taking RMDs this year. Technically, the IRS Notice suspends the penalty that would typically apply in the case where a required distribution is not taken. The 10-year rule, requiring heirs to distribute assets from inherited accounts within 10 years of the death of the account owner, was first introduced in 2020.
In recent guidance (IRS Notice 2024-35), the IRS also states final regulations are anticipated to be announced sometime later in 2024 and take effect in 2025.
This notice, like previous guidance, states the penalty for not taking an RMD will apply pending finalization of the regulations. However, it does not extend the 10-year timeframe required for fully distributing the inherited IRA.
Moving the goal post
In December 2019, the SECURE Act was signed into law introducing a new 10-year distribution rule on most non-spouse inherited retirement accounts.
The current rule applies to accounts in cases where the owner died after 2019. Non-spouses (with limited exceptions) are required to fully distribute the inherited account by the end of the 10th year following the year of death of the owner.*
Spousal beneficiaries still have the option of treating an inherited retirement account as their own or basing required distributions on their remaining life expectancy.
The prevailing interpretation of the statute was that heirs had to fulfill the 10-year requirement to distribute the account, but were not required to take annual distributions during that 10-year period. They had the flexibility to use the 10 years as they chose, as long as the account was distributed by the end of the 10th year following the owner’s death.
However, in February 2022 the Treasury Department issued proposed regulations clarifying how the 10-year rule would apply on inherited retirement accounts. In short, if the account owner died after reaching their required beginning date (RBD), the beneficiary would be required to (at least) take minimum distributions based on their life expectancy for the first nine years of the 10-year period, followed by a full distribution by the end of year 10.
Given the pending status of the proposed regulations, the IRS issued Notice 2022-53 in October 2022 to offer interim guidance. It stated no penalty would apply to those who inherited retirement accounts after 2019 where the owner died post-RBD and didn’t take an annual distribution in 2021 or 2022.
For 2023, the IRS issued Notice 2023-54, which extended Notice 2022-53 to the end of 2023, waiving the penalty for those with inherited accounts.
Seek advice
It’s important for those inheriting a retirement account to consult with a financial professional to determine a distribution plan that makes sense for their particular situation.
For more information on planning strategies related to the 10-year rule see "Distribution planning under the SECURE Act."
*Some non-spouse beneficiaries are not subject to the 10-year rule and can base required annual distributions on their life expectancy. These exceptions include heirs who are chronically ill, disabled, not more than 10 years younger than the deceased account owners, and a minor child of the deceased account owner.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.