IRS Finalizes Regulations on Inherited IRAs and the Ten-Year Rule 

By Kasey Franzoni, CISP

• Beginning with the SECURE Act of 2020, beneficiaries who inherit an IRA have had to reckon with the new “Ten-Year Rule,” requiring many to withdraw and pay tax on the entire inherited IRA in ten years’ time.
• Both the SECURE Act itself and the IRS’s Proposed Regulations, published in 2022, laid out some exceptions to the Ten-Year Rule that are based on characteristics of the person inheriting: a beneficiary who is a spouse or a minor child of the IRA owner, or is not more than ten years younger than the IRA owner, or who qualifies as chronically ill or disabled, is an “Eligible Designated Beneficiary” who is not subject to the Ten-Year Rule.
• For all other individual beneficiaries – those who are subject to the Ten-Year Rule – there was a surprise in the 2022 Proposed Regulations. Reading the Secure ACT alone, most industry experts believed that Ten-Year Rule beneficiaries could wait until year ten to withdraw and pay tax on the inherited IRA assets. That did not prove to be the IRS position.
• The IRS relied on what they call the “At Least as Rapidly Rule” to require that, if annual Required Minimum Distributions (RMDs) had already begun during the IRA owner’s life, then annual RMDs must continue in years one through nine after the IRA owner’s death when the account is inherited by a beneficiary subject to the Ten-Year Rule.
• Ten-Year Rule beneficiaries who inherit before the deceased IRA owner reached their RMD age can take as little or as much as they want over the first nine years of the ten-year period. The same is true for Roth Inherited IRA beneficiaries. Since Roth IRA owners are never required to take RMDs during their lifetime, they are always treated as having died before their RMDs begin.
• The IRS’s blend of the At Least as Rapidly Rule and the Ten-Year Rule caused such confusion that the Service eventually waived penalties on Ten-Year Rule beneficiaries for annual RMDs not taken before the tenth year for tax years through 2024.
• This July, Final Regulations at last replaced the Proposed Regulations. In the final version, the IRS’s position has not changed: Beneficiaries subject to the Ten-Year Rule must take RMDs each year during the payout period if RMDs had already begun during the owner’s life, and penalties will apply for annual RMDs not taken in 2025.
• As you can see, navigating inherited IRAs can be a confusing subject. Here at TCV, we have a team of IRA specialists ready to assist IRA owners and beneficiaries with these complexities. We encourage clients to reach out to us with any questions or concerns.