New Required Minimum Distribution Rules Clarification

Jim Steffen |

In December, I wrote a memo about some of the significant changes congress made to the retirement system beginning in 2020. One of the major subjects receiving attention is changes to the required minimum distribution rules. I discussed some of these changes in December but would like to revisit this to correct one thing and clarify another. 

One of the most notable changes in the new law is the age for which required minimum distributions (RMDs) is required. Beginning in 2020, RMDs will not be required until retirement account holders reach age 72. Under previous law, the age was 70.5. If you turned 70.5 before 2020, you must comply with the old rules. In other words, if you were born before July 1, 1949, you are required to begin taking RMDs at age 70.5. If you were born after this date, you are eligible to wait until age 72. (My previous memo had a typo indicating the cut-off was July of 1948.)

The rule change I’d like to clarify is regarding non-spouse beneficiaries of retirement accounts (such as children or grandchildren). When a non-spouse inherits a retirement account, in most cases the IRS mandates required minimum distributions to begin the following year. Under previous, these beneficiaries could “stretch” the RMDs out over their life expectancy based on the IRS mortality tables. The new law eliminates the annual minimum requirement but says an inherited account must be fully distributed within 10-years. 

For example, a 20 year old grandchild inherits a $100,000 IRA from her grandparent. Under the new law, that grandchild would have to withdraw all the funds by the 10th year following the year of inheritance. There is no requirement for the beneficiary to withdraw funds annually. The grandchild could wait until year 10 and then withdraw all the funds at once. 

There are some exceptions to this new 10-year rule. One notable group is those individuals who are not more than 10 years younger than the decedent. A good example of this would be siblings. For example, Bob tragically dies at age 55. His younger brother Joe, age 51, inherits Bob’s $500,000 IRA. Because Joe is no more than 10 years younger, Joe could still “stretch” the RMDs over his remaining expected life which, according to the IRS mortality tables, is 27 years. 

As you can see, there are plenty of nuances in the new law. Everyone in financial services, tax and estate planning are working diligently to get up to speed. 


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