These regulations answer some important questions about the latest RMD rules.
The federal government encourages retirement saving by giving a tax break to anyone who contributes to certain retirement accounts, such as a 401(k) or IRA. If you save money in a traditional tax-free retirement account, you can deduct the amount you contribute from your tax return this year, leaving you with more money to invest now.
But ultimately, Uncle Sam wants his tax revenue. You can’t postpone your taxes forever because the government requires mandatory minimum distributions. Retirees must start withdrawing money from tax-free retirement accounts starting at age 70, and some inherited IRAs may be subject to RMDs as well. And whenever you take a withdrawal from one of these accounts, you’ll have to pay the taxes you deferred years ago.
The penalties for missing a required withdrawal can be pretty steep. You could owe up to 25% of the amount you were supposed to withdraw if you don’t do it on time. And you’ll still have to make the withdrawal and pay taxes on it.
Recent legislation has resulted in several changes to the required minimum distribution rules, and the IRS issued final regulations in July to enforce the updated legislation, clarifying several key points. Here are three things everyone should know.
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1. You must continue to take RMDs on an inherited IRA
If you inherited an IRA from someone who died after December 31, 2019, you may be subject to RMDs on that account.
The Secure Act changed the rules for inherited IRAs. Instead of being able to spread withdrawals over your lifetime, newly inherited IRAs now only give you 10 years to empty the account. Exceptions apply for spouses, minor children, beneficiaries who are less than 10 years younger than the IRA owner, and disabled or chronically ill beneficiaries.
It wasn’t clear whether someone who inherits an IRA subject to the 10-year rule will also have to take RMDs in years one through nine. The IRS has waived the requirements for 2021 through 2024, but said it will enforce RMDs on inherited IRAs starting in 2025. Anyone who inherited an IRA from an owner who already took RMDs will still have to take annual distributions.
While the RMD rule does not apply retroactively, the 10-year rule still applies to anyone who inherited an IRA in 2020 or later. This means some beneficiaries will have to use up the entire inherited account by 2030 after taking minimum withdrawals in 2025 through 2029.
Because beneficiaries must use up the account within 10 years, it often makes sense to withdraw a certain amount each year to reduce the overall tax burden. However, IRS regulations limit the flexibility beneficiaries may have previously had.
2. Older beneficiaries can take smaller RMDs
If you inherit an IRA from someone younger than you who has already begun taking RMDs, you will still need to take RMDs from your newly inherited IRA. This can mean an additional tax burden on your inheritance, since you will likely need to take RMDs from your own accounts.
The new IRS rules offer some relief to older beneficiaries. Instead of taking RMDs based on your own life expectancy, you may be able to take RMDs based on the life expectancy of the original owner. This will result in a smaller distribution from the inherited account.
Additionally, because you are older than the original owner, you are not subject to the 10-year rule mentioned above. This allows you to limit your withdrawals to the required minimum throughout your life. However, you will likely pass the tax burden on to your beneficiaries, who may be subject to higher RMDs and the 10-year rule.
3. Anyone born in 1959 should plan to start taking RMDs at age 73
The Secure 2.0 Act raised the RMD age from 72 to 73 starting in 2023, and then raised it again to 75 in 2033. However, this created an interesting problem for anyone born in 1959. Since they would turn 73 in 2032, they would have to take their first RMD by April 2033. However, in 2033 they would then be 74, which is below the RMD age. So do children born in 1959 have to start taking RMDs at 73 or 75?
The IRS has proposed a rule to close the loophole in the Secure 2.0 Act that would require the minimum required withdrawal age to be 73. The table below shows your RMD age based on your birth year when the proposed rule takes effect.
| Year of birth | RMD age |
|---|---|
| Before 1949 | 70 1/2 |
| 1949–1950 | 72 |
| 1951–1959 | 73 |
| 1960 or later | 75 |
Data source: IRS.
Remember that you can delay your first required minimum distribution until April 1 of the following year, but your next distribution must be taken by December 31 of the same year, meaning that delaying your first RMD results in two distributions in a single year. It often makes sense to take your first distribution in the year you reach your RMD age to reduce your overall tax liability.
