Back in 2020, when the original SECURE act was implemented, one of the significant changes was related to beneficiary requirements as it related to retirement accounts. There were two categories created, Eligible Designated Beneficiary and Non-Eligible Designated Beneficiary. Examples of Eligible Designated are a spouse, a disabled individual, a chronically ill individual, a minor, or someone that is more than 10 years younger than the decedent. Non-Eligible Designated essentially covers most non-spousal beneficiaries.
The change to non-spousal requirements went from using the stretch provision (which would let someone disperse the account over their own life expectancy by taking a minimum withdrawal often over many years) to the 10 year rule. This rule stated that a non-spousal beneficiary must empty the IRA by year 10 following the decedents death. It seemed as if someone was free to take as little or as much as they wanted in years one through nine, as long as the account balance was zero by year ten. Most had an understanding that the 10 year rule replaced the stretch provision and that there were no annual minimum requirements to take anything out.
This had created a gray area regarding the intent, rules, and requirements that the IRS was trying to convey. After several years, we now recently have gotten clarity on this topic. A non-spousal beneficiaries requirements are now based upon one of two situations, related to whether or not the decedent had begun taking their RMD (requirement minimum distribution) or not.
If the decedent had NOT yet begun their RMD payments, the non-spousal beneficiary can follow the 10 year rule as it was originally interpreted. Meaning the beneficiary is ONLY required to deplete the account balance by year 10, and there are no annual ongoing requirements.
If the decedent had been taking their RMD payments, the non-spousal beneficiary still must comply with depleting the account by year 10, but ALSO has to take a minimum withdrawal each year which is calculated based on their age and life expectancy. This annual requirement begins next year in 2025, and is applicable to any non-spouse that inherited an IRA in 2020 or later. Because it took a while for them to clarify and make this policy official, there is no need for anyone that inherited an account in 2020-2024 to retro any distributions for those years, rather they just need to begin in 2025. Keep in mind that the 10 year timeframe coincides with the year one inherited the account, and not 2025 when the minimum distributions will start to be required.
If you inherited an IRA as a non-spouse between 2020 and 2024, it may be good to consult with your financial advisor and/or accountant to make sure you have an understanding of what you will need to do going forward. This change could impact the initial planning and thoughts around how to handle the inherited IRA.