IRS Finalizes RMD Regulations: What You Need to Know

The IRS has recently finalized new regulations on Required Minimum Distributions (RMDs), marking a significant shift that could impact your retirement planning. Whether you’re an individual navigating these changes or a financial professional guiding clients through them, understanding the distinction between Eligible Designated Beneficiaries (EDBs) and Non-Eligible Designated Beneficiaries (Non-EDBs) is crucial. In this article, we’ll break down these key terms and explain the latest regulatory updates, helping you make sense of how these changes might affect your retirement strategy and financial future.

Who Is an Eligible Designated Beneficiary (EDB)?

An EDB is someone who has special privileges when it comes to inherited retirement accounts. The IRS has identified a few categories of people who qualify as EDBs, each with specific rules that can make a big difference in how and when you need to take distributions.

Spousal EDB:

The most straightforward EDB is the surviving spouse. If you inherit a retirement account from your spouse, you have a few options. You can roll the account into your own IRA, treat it as your own, or even take distributions based on your life expectancy. The key benefit here is flexibility. You can often defer taxes longer and potentially benefit from more favorable withdrawal rules.

Non-Spousal EDB:

Non-spousal EDBs include minor children of the account holder, disabled individuals, chronically ill individuals, and beneficiaries who are not more than 10 years younger than the account holder. For these beneficiaries, the rules are a bit different:

• Minor Children: They can stretch distributions over their life expectancy until they reach the age of majority (usually 18). After that, they must follow the 10-year rule.
• Disabled and Chronically Ill Individuals: These beneficiaries can also stretch distributions over their life expectancy, allowing for a potentially longer tax-deferred growth period.
• Beneficiaries Not More Than 10 Years Younger: This category allows for stretching distributions over their life expectancy, similar to how spousal EDBs can manage their inherited accounts.

Who Is a Non-Eligible Designated Beneficiary (Non-EDB)?

Non-EDBs are individuals who do not qualify for the more favorable treatment of EDBs. The IRS has specified these as:

Adult Children: If you inherit an account from your parent or another relative and you are an adult child, you are considered a Non-EDB. The rules for Non-EDBs generally require that the inherited funds be distributed within 10 years of the account holder’s death. This means you’ll have to plan for the tax implications over a decade.

Individuals More Than 10 Years Younger Than the Account Holder: This can include many different people. For example, if your brother passed away, and you’re more than 10 years apart in age, you would have to follow the Non-EDB rules.

Non-Individual Beneficiaries: If the beneficiary is an entity, such as a trust or estate, different rules apply, often involving shorter distribution periods.

Simply put, anyone that does not meet criteria for being an EDB, is a Non-EDB. If you are ever unsure of what category you fit into, be sure to work with your financial professional. They’ll be able to guide you through everything and help avoid any mistakes when it comes to these rules.

What Rules Apply to EDBs and Non-EDBs?

For EDBs:

• Life Expectancy Method: Most EDBs (like spouses, minor children, disabled, and chronically ill individuals) can use the life expectancy method to determine Required Minimum Distributions (RMDs). This means distributions can be stretched over the beneficiary’s life expectancy, potentially reducing the annual tax burden.
• 10-Year Rule for Minor Children: While minor children can use the life expectancy method while they are minors, once they reach adulthood, they must switch to the 10-year rule.

For Non-EDBs:

• 10-Year Rule: Non-EDBs are generally required to withdraw the entire balance of the inherited account within 10 years of the account holder’s death. The entire amount must be distributed by the end of the 10th year, which could mean significant tax implications if not planned carefully.

How the Finalized Regulations Impact Non-EDBs

While many of the initial rules from the SECURE Act remain unchanged, there are some key points to discuss now that the rules have been finalized:

Key Insights

• For inherited accounts where the decedent passed away on or after their Required Beginning Date, Non-EDBs will need to start taking RMDs beginning in 2025. The new rule mandates that RMDs for these accounts be calculated based on the remaining life expectancy of the decedent as if they were still alive, or by following a set distribution period if applicable.
• For inherited accounts where the decedent passed away before their Required Beginning Date, Non-EDBs must follow the 10-year rule, but will not have to take RMDs.
• The IRS confirmed that non-spousal EDBs can continue to use the life expectancy method for RMDs.
• Once a minor child beneficiary reaches age of majority, they must follow the 10-year rule.
  • The 10-year clock starts once they reach age of majority.
  • Example: From age 12 to 18, the child can take RMDs based on their life expectancy. Once they turn 18, the 10-year rule starts. By the time the child turns 28, the account must be fully distributed.

RBD Note: As defined by the IRS, the Required Distribution Date is the deadline by which an individual must start taking RMDs from their retirement accounts, such as Traditional IRAs, 401(k)s, and other qualified retirement plans.

Conclusion

Understanding who qualifies as an EDB versus a Non-EDB is essential for managing inherited retirement accounts effectively. While EDBs enjoy more favorable treatment and can often stretch distributions over their lifetime, Non-EDBs face a stricter 10-year distribution rule. Keeping these distinctions in mind can help you plan your financial strategy and minimize tax impacts.