The Final Rmd Rules: Here’s What You Need to Know

Attention all retirement account owners and beneficiaries of inherited accounts (and that’s just about everybody):

In 2024, the IRS issued its final regulations on Required Minimum Distributions. To help position your retirement for success, you need to take these RMD changes into account.

RMDs are a big deal for retirement planning, and legislation over the past few years brought significant changes to RMD rules (If you’re already lost, skip down to the bottom of the page for a quick primer on RMDs). This article explains the final RMD rules and what they can mean for you.

HOW DID THESE CHANGES COME ABOUT?

It’s helpful to know the origins of these RMD changes to understand them fully.

Remember the SECURE Act of 2019? (Fun fact: The SECURE Act stands for the “Setting Every Community Up for Retirement Enhancement Act”). It was designed to improve the U.S. retirement system. One of its key provisions changed the beginning RMD age to 72 from 70½, allowing individuals more time for the opportunity to grow their retirement savings.

SECURE 2.0 Act of 2022 built on these changes by increasing the beginning RMD age again to 73 from 72, with the goal of gradually increasing it to 75 in the future.

The original SECURE Act also created significant changes for beneficiaries of retirement accounts that were inherited in 2020 or after.[CC1]

Unfortunately, the changes to distribution requirements for inherited accounts caused major confusion, so in 2024 the IRS clarified the requirements through finalized regulations.

KEY DEVELOPMENTS IN THE FINAL REGULATIONS

FOR ORIGINAL ACCOUNT OWNERS

As we mentioned, most of the outstanding questions surrounded people who inherited retirement accounts, and we’ll get to those in a second. But the final regulations also had two updates for original account owners (which would be you if you’re the person who opened the IRA or 401k).

• First, if you have a Roth 401k, you no longer have to take RMDs, ever (Again, this only applies to original owners). This makes the rule the same as for Roth IRAs, and it makes sense considering Roth money isn’t taxed anyway – assuming all requirements are met – so the IRS doesn’t care if you never withdraw it.
• Second, the IRS lowered the penalty for not taking your RMD by the due date, which was previously at a stunningly high 50%. Now, it’s 25% and, recognizing that some people just forget or otherwise accidentally miss the deadline, it’s lowered to 10% if corrected within 2 years.

FOR INHERITED ACCOUNTS

The SECURE Act introduced the “10-year rule” for accounts inherited in 2020 or after (If you inherited an account before 2020, the old rules still apply to you). It required some beneficiaries to fully distribute the inherited account within 10 years following the death of the original account owner.
 
What was still unclear is whether those beneficiaries had to do anything before the 10 years were up. Could they just leave all the money in there until the last minute?

In late 2024, the IRS clarified that there could still be RMDs for years one through nine for these inherited IRAs (But don’t worry – the requirement is waived for those years in which the IRS was still thinking it over – 2021-2024).

So, if you are a beneficiary subject to the 10-year rule, and you inherited an account from someone who died after their RMD beginning date, you must continue to take RMDs in years one to nine following the original owner’s passing and withdraw the entire balance by the end of year 10.
 
On the other hand, if the original owner died before their beginning RMD date, there are no RMDs required in years one to nine.

YEAR-OF-DEATH RMD

When the original owner dies, if they haven't taken their RMD yet for that year, that RMD can be taken by any beneficiary in any way they choose (in other words, if there are multiple beneficiaries, they don’t all have to take proportional slices of it).

ELIGIBLE DESIGNATED BENEFICIARIES

Previously, beneficiaries were divided into two categories with different rules: spouses and everyone else.

The new rules created a new category of beneficiaries called eligible designated beneficiaries. They include:

• Surviving spouses
• Minor children
• Disabled or chronically ill individuals
• Individuals who are not more than 10 years younger than the account owner (in other words, they are younger by a maximum of 10 years)

EDBs don’t have to adhere to the 10-year rule. Instead, they can stretch distributions over the course of their life, depending on their life expectancy, or they can choose the 10-year rule if the original account owner died before beginning RMDs.

Note that EDBs who are minor children are a special case because they won’t always be minors. The final rules say that once the child reaches the age of majority, they become subject to the 10-year rule.

TREATMENT OF TRUSTS AS BENEFICIARIES

The IRS also provided additional guidance on how RMDs should be handled when a trust is named as a beneficiary.

The short version is that there are trusts considered to be “see-through trusts” and others considered “non-see-through trusts” and beneficiaries of see-through trusts may be treated as beneficiaries of the account owner.

The rules (and trusts in general) can be very complex, so it’s best to talk to an estate attorney along with a financial advisor or tax professional if this situation applies to you.

STRATEGIC CONSIDERATIONS

Then there’s the question of not just following the letter of the law but doing it in a way that is most beneficial to you. For example, let’s say you inherit a traditional retirement account worth $500,000. You decide to take only the RMDs each year and leave the remainder in until the 10th year. If you already have a high income, that big bump could push you into the highest tax bracket, resulting in a significant portion of the remaining distribution being lost to taxes.

On the other hand, if you spread the distributions evenly over the 10 years (for example, take much more than the required amount every year) or take extra-large distributions in years when your other income is low, you might be able to keep your taxable income in a lower bracket, reducing the overall tax burden.

THE IMPORTANCE OF WORKING WITH AN ADVISOR

The rules around RMDs are extremely complex. An Edelman Financial Engines advisor can help you understand how they may affect your financial plan and help you develop a strategy that aligns with your individual situation and goals. A financial advisor can also collaborate with your tax professional to help minimize your tax liability and maximize your retirement savings.

TAKE CONTROL OF YOUR RMD STRATEGY

If you’ve recently inherited a retirement account, with the introduction of concepts like the 10-year rule and eligible designated beneficiaries, the newest rules can be confusing and intimidating. Hopefully this overview gives you some additional clarity.

In practice, the RMD rules remain complex and can be difficult to navigate. And you don’t want to screw it up: Mistakes can cost a lot of money and negatively impact your tax strategy and overall financial plan.

But withdrawals from inherited accounts aren’t just a trap door that can trip you up. They’re an opportunity to be strategic and maximize the value of your inheritance. We’re ready to help you make the plan that works best for you.

FREQUENTLY ASKED QUESTIONS ABOUT RMD RULES:

1. WHAT ARE REQUIRED MINIMUM DISTRIBUTIONS?

RMDs are the minimum amounts that retirement account owners (or those who inherit them) must withdraw annually. These withdrawals are mandatory for IRAs, SEP IRAs, SIMPLE IRAs, and most retirement plan accounts like 401(k)s and 403(b)s. The timing and rules depend on factors like age; whether you’re still working; whether you inherited the account, from whom, and when; and whether the account is a Roth.

2. WHEN DO I NEED TO START TAKING RMDS?

If you are the original owner, you must start taking RMDs by April 1 of the year following the year you turn 73. For example, if you turn 73 in 2025, your first RMD is due by April 1, 2026. Subsequent RMDs must be taken by December 31 of each year.

If you inherited the account, the rules about RMDs are more complicated and, for the most part, not based on your age.

3. WHAT HAPPENS IF I DON'T TAKE MY RMD ON TIME?

If you fail to take your RMD by the deadline, you may be subject to a penalty. The penalty for not taking your RMD on time has been reduced to 25% of the amount not taken, and it can be further reduced to 10% if the mistake is corrected within two years.

4. HOW ARE RMDs CALCULATED?

RMDs are calculated based on the account’s balance as of December 31 of the previous year and a life expectancy factor published in IRS RMD tables.

5. ARE RMDs TAXABLE?

For the most part, yes. The exception would be RMDs (or any withdrawals) from a Roth account that you inherited. You’re still required to take RMDs, but if the requirements are met, they will be tax-free.