Retirement

Reviewing RMD Rules as IRS Issues Final SECURE Act Regulations

By Chris Duderstadt

August 20, 2024

Reviewing RMD Rules as IRS Issues Final SECURE Act Regulations

Key Points – Reviewing RMD Rules as IRS Issues Final SECURE Act Regulations

  • RMD Rules for Account Owners and Beneficiaries
  • The 10-Year Payout Rule
  • Why RMDs Are Like Pringles
  • Should You Take an RMD in 2024 Even Though the IRS Granted Relief?
  • RMDs Must Be Taken Beginning in 2025
  • 6-Minute Read

Clarification on the 10-Year Rule for RMDs

The SECURE Act brought significant changes to the wealth management industry (specifically pertaining to retirement planning) when it became law in 2020. There have been numerous SECURE Act regulations since it was passed, which have created a lot of confusion for people as they plan for retirement. Many of those regulations have involved Required Minimum Distributions. Now that the IRS has issued final SECURE Act regulations,1 let’s review RMD rules so you can hopefully have more answers than questions when planning your RMDs.

What Is an RMD?

If you’re wondering, “What in the world are Required Minimum Distributions?” let’s answer that before we go any further. RMDs are the minimum amount that you must withdraw from your retirement account or IRA on an annual basis. It’s important to understand when your required beginning date is for RMDs. As of January 1, 2023, you’re required to take your first RMD by April 1 of the year after you attain age 73. By 2033, the RMD age increases to 75.

RMD Rules for Inherited IRAs

There are additional RMD rules that pertain to inherited IRAs. These RMD rules were at the heart of the IRS’s final SECURE Act regulations on July 18, 2024.2

Prior to the SECURE Act, most non-spouse beneficiaries were able to stretch their IRA withdrawals over their life expectancy (stretch IRAs). After the SECURE Act largely eliminated stretch IRAs, most non-spouse beneficiaries (non-eligible designated beneficiaries) were required to empty the inherited IRA by the end of the 10th year following the account owner’s death.

But wait, there’s more. The IRS proposed regulations that if the account owner passed away on or after they were to begin RMDs, any non-eligible designated beneficiaries would be subject to annual RMDs within the 10-year period to empty the account. The IRS didn’t pivot on its stance when issuing final SECURE Act regulations.

Three Types of Beneficiaries

Non-eligible designated beneficiaries are one of three types of beneficiaries outlined within the SECURE Act. In addition to non-spouse designated beneficiaries, there are also eligible designated beneficiaries and non-designated beneficiaries. FIGURE 1, below, distinguishes the differences between the beneficiaries and the RMD rules they must follow.

RMD Rules
FIGURE 1 – IRA Beneficiaries

The ”At Least As Rapidly” Rule … or “The Pringles Rule”

So, what went into the IRS’s decision? There’s a rule on RMDs within the tax code that’s known as the “at least as rapidly” rule.3 It states that once annual RMDs have started, they can’t stop.

One of our executive advisors, Matt Kasper, CFP®, AIF®, recently attended an RMD rules seminar that was led by Jeffrey Levine, CPA/PFS, CFP®, AIF, CWS®, MSA, who is the chief planning officer for Buckingham Wealth Partners and the lead financial planning nerd for Kitces.com. Jeffrey had another name for the “at least as rapidly” rule. He called it, “the Pringles Rule,” because of the famous Pringles “Once you pop, you can’t stop” slogan from the 1990s.4

Will the Confusion Surrounding RMD Rules Ever Stop?

Here’s the thing, though. For 2021, 2022, 2023, and 2024, the IRS granted relief by waiving annual RMDs for beneficiaries who were subject to the 10-year rule. The IRS stated in its final SECURE Act regulations that those RMDs must be taken beginning in 2025.

Beneficiaries who are subject to the 10-year rule and haven’t taken an RMD yet in 2024 don’t need to take one since the IRS granted relief on them. However, Matt says that doesn’t mean you shouldn’t take an RMD in 2024.

“Even though you didn’t need to take RMDs in 2021, 2022, 2023, and 2024, there’s still the 10-year rule from whenever you inherited the account. You want your tax plan to coordinate how you can withdraw these funds from inherited IRAs.” – Matt Kasper, CFP®, AIF®

RMD Rules

Tax Reduction Strategies

Matt met with a new client earlier this month to determine what they were doing with their inherited IRA. They hadn’t been doing anything with it and were unaware of the 10-year rule. Again, there are two pieces of inherited IRA puzzle for inherited IRAs. They need to get the money out within the 10th year following the account owner’s death and begin taking annual RMDs within that 10-year period starting in 2025.

Remember that tax rates are also projected to go up after 2025 if the tax rates outlined in the Tax Cuts and Jobs Act sunset as scheduled.5 Tax rates would revert to the rates from 2017, so that’s added incentive to take more money out now while rates are lower.

What’s the Penalty for a Missed RMD?

There can be significant penalties for missed RMDs, so it’s important to understand how much your annual RMDs are and when you must take them. Any RMD amount that isn’t withdrawn on time is subject to a 50% excise tax. If the RMD is paid in full within two years after the due date, the excise tax may drop to 25% or 10%.

Wrapping Up Our Review of RMD Rules with an Example

We’ll continue to publish more content on the IRS’s final SECURE Act regulations, but let’s wrap up this article on RMD rules with a quick example. Let’s say that Chelsea inherited an IRA from her dad Bob after he passed away at age 82 in 2021. As a non-eligible designated beneficiary, Chelsea must follow the 10-year rule and empty the account by December 31, 2031.

In addition to emptying the account by the end of that 10-year period, Chelsea must take annual RMDs. If she missed RMDs in 2022 and 2023, that’s OK because the IRS waived the penalties for those years. She doesn’t need to take an RMD in 2024, but we would likely encourage her to consider doing so since she still needs to empty the account by December 31, 2031. Chelsea would then need to take annual RMDs from 2025 through 2030. Missing any of those RMDs would subject her to an excise tax.

Do You Have Any Questions About RMD Rules?

The RMD rules that the IRS has laid out have caused a lot of confusion for a lot of people. It’s one of many reasons why it’s important to work with a wealth management team that puts your needs ahead of their own.

Let’s circle back to the example with Chelsea to highlight how our team would likely go about her situation. First, we need to understand Chelsea’s goals. What does she want to accomplish? One of our CFP® Professionals will work with Chelsea to build her a financial plan that keeps her goals top of mind.

The CFP® Professional would receive plenty of help from other subject matter experts to build and review Chelsea’s plan. As Matt mentioned, having a forward-looking tax plan that considers current and future tax rates is critical. That’s why our CFP® Professionals work alongside our CPAs to review tax planning strategies that could reduce the amount of taxes that Chelsea pays over her lifetime. What strategies could Chelsea implement to lower the RMD amounts of that inherited IRA?

Inherited IRAs are a big aspect of wealth transfer, which is why it’s also important to have an estate plan. If Bob wasn’t taking a multigenerational approach to financial planning, Chelsea could face some of the repercussions of that.

Learn More About Our Team Approach

Notice that we haven’t even touched on investments yet as a part of our team approach. We also have CFAs and company retirement plan experts on staff. Our team firmly believes that wealth management done right involves a coordinated effort from professionals to get the best possible results for clients. Understanding RMD rules and determining RMD strategies before and after retirement is a prime example of why a team approach to wealth management is essential.

To learn more about how these RMD rules pertain to your unique situation and how our team can help, start a conversation with our team below

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We’ll continue to keep you posted on important legislation like the SECURE Act that can impact your plans for retirement. We’re passionate about providing financial education so you can make informed decisions with your money.

Resources Mentioned in This Article

Downloads

Tax Reduction Strategies Guide

Other Sources

[1] https://www.irs.gov/newsroom/treasury-irs-issue-updated-guidance-on-required-minimum-distributions-from-iras-other-retirement-plans-generally-retains-proposed-rules

[2] https://irahelp.com/slottreport/irs-issues-final-secure-act-regulations-controversial-annual-rmd-requirement-during-10-year-rule-stands/

[3] https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions

[4] https://www.youtube.com/watch?v=77rKo-WdULY

[5] https://taxfoundation.org/blog/tcja-expiring-means-for-you/

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.