IRS Extends Relief on Inherited IRA 10-Year Rule Enforcement

The Internal Revenue Service has again extended transition relief for required minimum distribution rules for inherited individual retirement accounts on Tuesday.

Since the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019, IRAs that are inherited–that is, given to a non-spouse beneficiary–must be completely distributed within 10 years, a requirement known as the 10-year rule. This provision only applies to IRA owners who died after 2019.

Since RMDs are tied to a beneficiary’s life expectancy, an IRA left to a younger person, such as the IRA owner’s grandchild, would carry very small RMDs since the balance would be divided out by the remaining years of their life. This practice is known informally as a stretch IRA and can be used to pass down large sums of wealth. The 10-year rule limits this practice, though minors who inherit IRAs do not start their 10-year clock until they turn 21. Since distributions are required, a 10% early withdrawal penalty is not imposed.

In February 2022, the IRS issued a proposal that would have required IRA owners subject to the 10-year rule to take an RMD from the account each year until the balance was depleted. The IRS noted that many commenters were caught off guard by this proposal and believed there would be no RMD as long as the balance was distributed at the end of 10 years.

The IRS notice on Tuesday said that the 10-year RMD rule would not be required in 2024, adding to relief made for years 2020 through 2023.

In the notice, the IRS said it expects 2024 to be the last year such relief is granted. The notice said that “the final regulations that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to issue related to RMDs will apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025.”

When the IRS approves final regulations, those not in compliance with the RMD will have to pay an excise tax of 25% of the balance they should have withdrawn, or 10% if the error is corrected within two years.