IRS Finalizes 10-Year Rule

The IRS will publish final rules Friday clarifying how a new 10-year rule regarding the withdrawal and eligibility requirements for inherited retirement assets will be implemented in 2025. The regulator posted the rules Thursday in “unpublished” format.

The Setting Every Community Up for Retirement Enhancement Act of 2019 required that certain beneficiaries of a deceased individual retirement account owner or plan participant must draw down their assets within 10 years of receiving those assets—as opposed to their “applicable” life expectancy.

The IRS had previously indicated it would mandate that required minimum distributions be taken for each of those 10 years starting in 2022 if the original participant had already begun taking RMDs, but it postponed that interpretation through 2024 to give more time for assessment and implementation.

“The final regulations reflect changes made by the SECURE Act and the SECURE 2.0 Act impacting retirement plan participants, IRA owners and their beneficiaries,” the IRS wrote in a notice Thursday. “While certain changes were made in response to comments received on the proposed regulations issued in 2022, the final regulations generally follow those proposed regulations.”

The regulation distinguishes between instances in which the original participant began taking RMDs before they died and instances when they died before they started taking RMDs. It also differentiates between eligible designated beneficiaries and designated beneficiaries.

Eligible Beneficiaries

Eligible beneficiaries are a participant’s spouse, someone disabled or chronically ill or another beneficiary “not more than 10 years younger,” such as a younger sibling. Elizabeth Thomas Dold, a principal at Groom Law Group, explains that the 10-year rule is not mandatory for eligible beneficiaries.

If the original participant had not already begun taking RMDs, then an eligible beneficiary can either choose to take RMDs consistent with their life expectancy or elect the 10-year rule. If the participant died after taking RMDs, then the beneficiary can take RMDs consistent with the longer of their life expectancy or that of the participant. The latter will often result in no difference when the beneficiary is younger than the participant, Dold says.

A partial exception from the 10-year rule is made for heirs younger than 21: Their 10-year clock does not start until they turn 21. In cases in which a participant has left assets to multiple minor children, “a full distribution is not required until ten years after the youngest of the employee’s children who are designated beneficiaries attains the age of [21].”

At age 21, the beneficiary will have to take RMDs every year consistent with their life expectancy, which will tend to yield smaller amounts, and must then clear out the account by the end of 10 years, Dold explains.

Ineligible Beneficiaries

The 10-year rule is mandatory for ineligible beneficiaries, often adult children of the participant, according to Dold.

When the participant has begun taking RMDs, the beneficiary must take RMDs “at least as rapidly” as the participant had been. In the event there are assets remaining at the end of 10 years, the remaining balance will be forced out.

If the initial participant had not taken an RMD, then the ineligible beneficiary does not need to take RMDs and can choose to simply withdraw the entire balance at the end of 10 years.