More RMD Updates

Last month we wrote a couple of blog posts dealing with the proposed regulations from the IRS on inherited retirement plans including IRAs.

The key provision that affects most individuals deals with having to fully deplete the IRA by the end of the 10th year after the death of the IRA owner (I will use IRA as the generic term for all retirement plans).

Everyone thought originally that people that inherited the IRA could take the funds out anyway they wanted to as long as the account was fully depleted by December 31 of the 10th year after year the decedent passed away.

For example, if someone dies in 2022, the inheritor would have to fully deplete the account by December 31, 2032 but may elect to take no distributions in 2023-2031. You must make sure that the owner’s RMD for 2022 was made during their lifetime. If not, this must happen in 2022.

The proposed regulations indicates that if the person who died had started their required minimum distributions, then the heirs have to take a distribution each year and then fully deplete it in the 10th year. However, if the person has not started their RMD, then the heirs don’t need to take anything out for nine years and then fully deplete in year 10. Here is an example:

Jack and Diane pass away in 2022. Jack is age 74 and Diane is age 68. They each have $1 million in IRAs and their only son Bill, age 38 inherits that IRA. Since Jack is taking a required minimum distribution each year, Bill must take a distribution in 2023 based on his life expectancy and then another minimum distribution in 2024-2031. Since Diane is not subject to the RMD rules, Bill can wait and fully deplete it in 2032.

Now Bill will probably not want to take all of Diane’s in 2032 since that will put him in the maximum tax bracket, but he has options with her IRA but not Jack’s.

Remember that these are proposed regulations and changes may occur in the final ones. We will keep you posted.