What did the IRS final RMD regulations decide about the 10-year rule?

The final regulations confirm that non-eligible designated beneficiaries who inherit retirement accounts from owners who died after their required beginning date must take annual minimum distributions during the 10-year period and empty the account by year ten. Beneficiaries of owners who died before the RBD need only empty the account by year ten.

How do the final RMD regulations affect estate planning for retirement accounts?

The final rules make Roth conversions more valuable because Roth accounts have no RMDs for the original owner, and inherited Roth accounts require only the 10-year distribution with no annual minimums. Beneficiary designation strategies should be reviewed in light of the annual distribution requirements for traditional accounts.

IRS Finalizes Regulations on Required Minimum Distributions | Lynch Law

After more than four years of uncertainty, the IRS and Treasury Department released final regulations on required minimum distributions from retirement accounts on July 19, 2024. The final regulations, which run to 260 pages, resolve the most significant open question under the SECURE Act's ten-year rule: whether non-eligible designated beneficiaries must take annual distributions during the ten-year period, or whether they may simply empty the account by the end of the tenth year.^[1] The answer depends on whether the original account owner died before or after the required beginning date, and the distinction has significant implications for estate planning with retirement assets.

The Ten-Year Rule: Background

The SECURE Act of 2019 eliminated the "stretch IRA" for most beneficiaries who inherit retirement accounts after December 31, 2019. Under prior law, a designated beneficiary could take distributions over the beneficiary's own life expectancy, potentially stretching the tax deferral over decades. The SECURE Act replaced this with a ten-year rule: most non-spouse beneficiaries must withdraw the entire account balance by the end of the tenth calendar year following the year of the account owner's death.^[2]

The statute created an exception for "eligible designated beneficiaries," a narrow category that includes surviving spouses, minor children of the account owner (but not grandchildren), disabled individuals, chronically ill individuals, and individuals not more than ten years younger than the decedent. These beneficiaries may still use the life expectancy method.

The Annual Distribution Question

The critical question that the IRS took four years to resolve was whether the ten-year rule requires annual minimum distributions during the ten-year period, or whether the beneficiary has complete flexibility as to the timing of withdrawals so long as the account is fully distributed by year ten.

The final regulations confirm the approach the IRS first proposed in 2022: it depends on whether the account owner died before or after the owner's required beginning date. If the owner died on or after the required beginning date (generally April 1 of the year following the year the owner turned 73), the beneficiary must take annual distributions during years one through nine, calculated using the beneficiary's life expectancy, and must withdraw any remaining balance in year ten. If the owner died before the required beginning date, the beneficiary has full flexibility during the ten-year period and need only ensure the account is empty by the end of year ten.^[3]

Transition Relief for 2021 Through 2024

Because the IRS did not finalize these rules until mid-2024, many beneficiaries who would have been required to take annual distributions under the final rules failed to do so in 2021, 2022, 2023, and 2024. The IRS acknowledged this problem by providing transition relief: no penalties will apply for missed distributions during those years, and beneficiaries are not required to make up the missed amounts. However, the ten-year clock has not been extended. A beneficiary who inherited an account from an owner who died in 2020 must still empty the account by December 31, 2030.^[4]

Planning Implications

Roth Conversion Strategies

The final regulations reinforce the value of Roth conversions as part of an estate plan. Because Roth IRAs have no required minimum distributions during the owner's lifetime and the required beginning date rules do not apply, a beneficiary who inherits a Roth IRA is subject only to the ten-year distribution requirement without annual minimums — regardless of the owner's age at death. This allows the inherited Roth assets to continue growing tax-free for the full ten-year period. For account owners who expect their beneficiaries to be in high tax brackets, converting traditional IRA assets to Roth during the owner's lifetime can produce significant after-tax savings for the next generation.

Beneficiary Designation Review

The final regulations make it essential to review beneficiary designations in light of the beneficiary's expected tax situation during the ten-year distribution period. Naming a trust as beneficiary adds complexity because the trust must qualify as a "see-through" trust for the ten-year rule to apply (rather than the five-year rule). Accumulation trusts and conduit trusts have different consequences under the final regulations, and the choice between them requires careful analysis of the beneficiary's circumstances.

Coordination with Other Estate Planning

For estate plans that rely on retirement assets as a significant component of the estate, the final RMD regulations should prompt a comprehensive review. The accelerated distribution timeline means beneficiaries will recognize more income in a compressed period, which affects not only income tax rates but also the net investment income tax, the phase-out of various deductions and credits, and eligibility for income-based programs. Advisors should model the projected tax impact of different distribution strategies within the ten-year window and consider whether reallocating assets between retirement accounts and other vehicles would produce a better after-tax outcome for the family.

References

^[1] T.D. 10001, 89 Fed. Reg. 58,896 (July 19, 2024) (final regulations on required minimum distributions under §§ 401(a)(9), 408(a)(6), and 408(b)(3)).
^[2] SECURE Act, Pub. L. No. 116-94, § 401 (2019), amending IRC § 401(a)(9)(H).
^[3] Treas. Reg. § 1.401(a)(9)-5(e)(2) (as finalized in T.D. 10001).
^[4] Notice 2024-35, 2024-24 I.R.B. (extending transition relief through 2024 for beneficiaries subject to the annual distribution requirement under the ten-year rule).