The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.
Here’s some background:
In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)
The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).
Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.
So, how is the 2025 RMD calculated? Here’s an example:
In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.
Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Investment advisory services offered through Donato Wealth Management, PLLC, dba Empower Wealth Management and Empower Wealth & Tax (“Empower Wealth Management” or “EWM”),
an SEC registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional adviser before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned, or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Personal investment advice can only be rendered after the engagement of EWM, execution of required documentation, and receipt of required disclosures. All investment and insurance strategies have the potential for profit or loss. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. Past performance is no guarantee of future results. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD #305031.
Insurance products and tax services are offered through Senior Tax and Insurance Advisors, PLLC, dba Empower Wealth Group (“Empower Wealth Group” or “EWG”). Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products offered through EWM. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. EWG is not affiliated with or endorsed by the U.S. Government, Social Security Administration, nor the federal Medicare program. You may be contacted by a licensed insurance agent. Calling the number above will direct you to a licensed insurance agent. EWG may not offer every plan available in your area. Any information provided is limited to plans available in your area. Please contact Medicare.gov or 1-800-MEDICARE.
EWM and EWG are both affiliated companies of Empower Wealth, LLC (“Empower”). Investment adviser representatives of EWM may have a financial incentive to recommend tax and insurance products and/or services offered through EWG which presents a conflict of interest. This conflict is addressed by EWM’s adoption of its Code of Ethics, which requires that all EWM’s Associated Persons place the interest of clients ahead of their own. Clients of EWM are also free to choose their own tax and/or insurance professionals and are under no obligation to utilize the services offered through any related entities or persons associated with Empower.
Strategic Partners listed on this page are not employees of EWM and are not affiliated through common ownership.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.
© Empower Wealth Management All Rights Reserved.
