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Treasury Department Issues Final Rules for Required Minimum Distributions
By Rachel Anderle
The Treasury Department has finalized the rules concerning Required Minimum Distributions (RMDs) to coincide with the changes made by the SECURE Act (2019) and SECURE 2.0 Act (2022). These Acts tweaked long in place rules regarding retirement account distributions. The Treasury promulgated proposed rules in 2022 and finalized those rules in July 2024. The final rules, which will take effect January 1, 2025, remain largely consistent with the proposed rules.
The 10-Year Rule
The final rules mirror the 10-year rule first introduced in 2022 proposed regulations. After the death of the account holder, most beneficiaries can no longer stretch their distributions over their own life expectancy. Only eligible designated beneficiaries (which includes the account holder’s spouse, minor child, a disabled individual, or someone less than 10 years younger than the account owner) can do so. For all other beneficiaries, the 10-year rule applies, requiring the beneficiary to empty the account by the 10th calendar year following the account owner’s death.
The final rules also clarify how the 10-year rule applies to account owners who had been taking RMDs when they died. The Act itself only requires the account to be depleted by the end of the calendar year of the 10th anniversary of the account holder’s death, leading many to hope that beneficiaries could wait until the ninth year after the account holder’s death to deplete the account. However, the final rules emphasize that the account must continue to distribute annually once the account holder has started receiving RMDs, in addition to the requirement that the account is completely depleted in 10 years.
Exceptions for Eligible Beneficiaries
While eligible beneficiaries can still stretch RMDs over their life expectancy, the 10-year rule will still apply to eligible beneficiaries in certain situations:
- If an eligible designated beneficiary had been taking payments based on their own life expectancy and they die, the distributions must continue annually for up to 10 years.
- If the eligible designated beneficiary was a minor, once the minor reaches the age of majority, distributions must continue annually for up to 10 years.
- When there are multiple minor children as eligible designated beneficiaries, the 10-year rule applies only when the youngest minor reaches the age of majority.
Trusts as Beneficiaries:
When a trust is the beneficiary of a qualified account, the beneficiaries of the trust may be considered beneficiaries of the account holder for the purposes of the Act if the trust meets specific criteria. These include:
- The trust must be valid under state law.
- It must be irrevocable or become irrevocable upon the account holder's death.
- The trust must have identifiable beneficiaries.
- The trust must meet documentation requirements, which might include a plan administrator requesting a list of trust beneficiaries and descriptions of their entitlements, or the trust document itself.
As these final rules come into effect, it is crucial for retirement account owners to ensure that their beneficiary designations are properly aligned with their financial goals and compliance requirements. Taking proactive steps now will maximizing the effectiveness of their retirement planning.
In future newsletters, we will explore in more detail the final rules. If you have a few free hours and lots of coffee, you can click here to read the final rules.
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