By Robert E. Quittner, Jr., CFP® & CMFC™
Investment Advisor Representative
[email protected]
Before diving into this important update, I glanced at my calendar—Peter and I will be out of the office attending a conference starting this Friday. By the time we return, June will nearly be in the rearview mirror! It feels like just yesterday I was struggling to remember to write “1/25” on forms, and now here we are, staring down July.
One of the services we offer our clients is tracking their Required Minimum Distributions (RMDs)—not just from the IRAs they hold with us, but across all of their accounts. While traditional IRA RMDs are fairly straightforward, inherited IRAs have become increasingly complicated following the passage of the SECURE Act in December 2019.
Understanding the Three Beneficiary Categories
The SECURE Act established three types of beneficiaries, each with a different set of distribution rules:
Eligible Designated Beneficiaries (EDBs)
These individuals are granted an exception to the 10-year rule and may stretch distributions over their own life expectancy.
Examples include:
- Surviving spouses
- Minor children of the original account owner (until they reach the age of majority)
- Disabled or chronically ill individuals
- Anyone less than 10 years younger than the deceased
Designated Beneficiaries
These are individual beneficiaries who do not qualify as EDBs, such as adult children, grandchildren, or siblings.
Key rules:
- The inherited IRA must be fully distributed within 10 years.
- If the original IRA owner had already started their RMDs, annual RMDs must also be taken in years 1 through 9, with the full account balance depleted by the end of year 10.
Non-Designated Beneficiaries
These are not individuals—think estates, charities, or certain types of trusts.
Key rules:
- If the owner died before their Required Beginning Date (RBD), the account must be emptied within five years.
- If the owner died after their RBD, RMDs follow the “ghost rule,” using the decedent’s life expectancy.
What’s Changing in 2025?
If you inherited an IRA after 2019, there’s an important rule change: RMDs will resume in 2025. When the SECURE Act was passed, it created confusion over whether annual RMDs were required within the 10-year window. While the IRS sorted out the guidance, it waived annual RMDs from inherited IRAs for tax years 2020 through 2024. That grace period is ending.
Who Needs to Take RMDs in 2025?
It depends on when the original IRA owner passed away:
- If they died after beginning their own RMDs (generally after age 72 or 73):
- You must take annual RMDs in years 1–9 (starting in 2025).
- The account must be fully depleted by year 10.
- If they died before starting RMDs:
- No annual RMDs are required
- The entire account must still be emptied by December 31 of the 10th year.
What Happens If You Miss an RMD?
Missing an RMD could trigger a 25% IRS penalty on the amount you failed to withdraw. That penalty may be reduced to 10% if corrected quickly, but it’s better to plan ahead and avoid the penalty altogether.
What Should You Do Now?
Here are a few steps to stay ahead of the 2025 RMD requirements:
- Review the original IRA owner’s date of death
- Determine your beneficiary classification
- Confirm whether RMDs will apply to your inherited IRA
- Calculate your 2025 RMD using your December 31, 2024 balance
- Give us a call – we’re here to help you interpret the rules and plan your distributions
Don’t let these evolving rules catch you off guard. A little planning today can help you avoid costly mistakes down the line. While we can’t change the regulations, we can help ensure your heirs don’t face unnecessary complications when they inherit your IRA.
And finally—on a lighter note—last Saturday’s news said it had rained 12 of the last 14 weekends. But this weekend looks sunny, so I hope you’ve got outdoor plans lined up. Enjoy it!
Rob