Spring 2025

Certain beneficiaries of inherited qualified retirement plan benefits (inherited QRPB) must be proactive in their planning due to a renewed expectation of annual required minimum distributions (RMDs) for calendar year 2025. Among other changes, the Setting Every Community Up for Retirement Act of 2019 (the SECURE Act) substantially altered the distribution period for which beneficiaries of defined contribution plans – including, but not limited to, 401(k), 403(b), and individual retirement arrangement (IRA) accounts – must withdraw the plan benefits.

Under the final regulations of the SECURE Act, published July 19, 2024, and effective as of Jan. 1, 2025, designated beneficiaries who do not qualify as eligible designated beneficiaries of an inherited QRPB must take annual RMDs for each year following the year of the decedent-plan-participant’s death. Importantly, such beneficiaries must also withdraw the entire balance of the inherited QRPB by the end of year 10 following the year of the decedent-owner’s death.

While the IRS has waived the penalties for a missed RMD for inherited QRPBs for calendar years 2021-2024, the 10-year distribution period for the inherited QRPBs remains unchanged. This can potentially result in both larger RMDs than expected and a greater distribution due at the end of year 10, for which clients and their advisers should plan now.

Inherited QRPBs and the SECURE Act

The SECURE Act eliminated the “stretch” distribution treatment for certain beneficiaries of inherited QRPBs from decedent-plan-participants who died on or after Jan. 1, 2020. Prior to the SECURE Act, a beneficiary who inherited QRPBs from a decedent-plan-participant who had attained his or her required beginning date could take RMDs annually over the longer of the life expectancy of such beneficiary or the decedent-plan-participant. The SECURE Act changed the rules so that only certain eligible designated beneficiaries (EDB) could take RMDs under the pre-SECURE Act rules. Generally, EDBs include a surviving spouse, a minor child, a beneficiary who is disabled or chronically ill, or a beneficiary who is not 10 years younger than the decedent-plan-participant. Any other individual designated on a decedent-plan-participant’s beneficiary designation form is deemed to be a designated beneficiary. Under the SECURE Act, inherited QRPBs must be distributed in full to the designated beneficiaries by the end of a 10-year period starting the year following the decedent-plan-participant’s death (the Ten-Year Rule). Therefore, if a decedent-plan-participant died on Nov. 1, 2020, the designated beneficiary would have to withdraw the entire inherited QRPB by Dec. 31, 2030.

SECURE Act Final Regulations

The SECURE Act final regulations confirm that a designated beneficiary must take annual RMDs for each year (one through nine) following the death of the decedent-plan-participant. This “at least as rapidly” rule provides that the designated beneficiary must calculate the RMD each year by dividing the inherited QRPB balance as of the end of the prior taxable year by the designated beneficiary’s life expectancy factor, using the IRS’s Single Life Expectancy Table. The application of this “at least as rapidly” rule with the Ten-Year Rule confused many clients and advisers in their review of the SECURE Act, so the IRS waived the excise tax of 50% assessed on missed RMDs for inherited QRPBs held by designated beneficiaries for each calendar year from 2021 through 2024. The SECURE Act 2.0 of 2022 also reduced this penalty to 25% for future years. Therefore, some designated beneficiaries chose not to take (or ignored) the annual RMDs for their inherited QRPBs.

For calendar year 2025, inherited QRPBs held by designated beneficiaries for decedent-plan-participants who died after Jan. 1, 2020, will be subject to their first RMD with an excise tax levied on any missed RMDs since the enactment of the SECURE Act. Without annual RMDs over the past few calendar years, account balances may have grown for the inherited QRPBs but the life expectancy factor for the designated beneficiaries has decreased. This generally means a greater RMD will be due.

More importantly, the period under the “at least as rapidly” rule remained unchanged, even when the excise tax for missed RMDs was waived. So, under the example above, the period for ultimate distribution remains Dec. 31, 2030, for a designated beneficiary’s inherited QRPB from a decedent-plan-participant who died Nov. 1, 2020. This may create income tax planning concerns for some designated beneficiaries and their advisers.

Case Example

Let’s assume Betty, age 75, died on April 1, 2022, after taking her RMD for 2022. She left her IRA solely to her son, Michael, who was 42 years old in 2022 and not chronically ill or disabled. Michael inherits the IRA and, because Betty attained her required beginning date at the time of her death, Michael must take annual RMDs from the IRA for each year starting in 2023, and must also withdraw the entire remaining balance by Dec. 31, 2032. Under the IRS Single Life Expectancy Table, in 2023, Michael, then 43, has a life expectancy factor of 42.9. If Betty’s IRA is valued at $5 million as of Dec. 31, 2022, Michael’s RMD for 2023 would have been about $116,550. Michael’s tax adviser correctly tells him that the IRS waived the excise tax on missed RMDs from inherited IRAs because Michael is a designated beneficiary. With that explained, Michael chooses not to take an RMD in 2023.

As of Dec. 31, 2023, the inherited IRA is now worth $5.5 million, and Michael’s new life expectancy factor for 2024 is 41.9, resulting in an RMD of about $131,265 for 2024. Once again, Michael’s tax adviser tells him that the excise tax is waived for any missed RMD for his inherited IRA, so Michael again does not take the RMD. The inherited IRA continues to grow, and by Dec. 31, 2024, the account balance is $6.05 million. In 2025, Michael’s life expectancy factor is now 41.0 and the RMD is about $147,561. In 2025, however, the IRS is no longer waiving the excise tax on any missed RMDs for inherited IRAs. Under the SECURE Act 2.0 of 2022, Michael would owe 25% of the value of a missed RMD, or about $36,890. Therefore, advisers should carefully review the annual RMD for 2025 with designated beneficiaries of inherited QRPBs.

More importantly, even if Michael takes his annual RMD for each calendar year from 2025 through 2032, he will need to withdraw the account balance from the inherited IRA as of Dec. 31, 2032. If we assume Michael takes only his annual RMDs during this period, and the account balance grows by 10% annually, Michael may have to take almost $10.5 million as the balance of the inherited IRA at the end of 2032, a costly income tax consequence depending on Michael’s state of domicile at that time. Michael’s advisers would add value to Michael’s income tax planning by projecting his other taxable income for these calendar years and analyzing how much more than his annual RMD Michael takes in each year to minimize the income taxes owed in the aggregate for the inherited IRA.

Next Steps

The change in the period for certain designated beneficiaries of inherited qualified retirement plan benefits under the SECURE Act of 2019 to take RMDs requires proactive tax planning. Advisers should help calculate the annual RMD that such beneficiaries must take and communicate the potential tax consequences over the remaining duration of the payout period of the inherited plans. This analysis and planning might help the beneficiaries minimize the overall income taxes owed from these inherited plans. 

Brian M. Balduzzi, JD, LLM (Taxation), CFP, is an attorney with Faegre Drinker Biddle & Reath LLP in Philadelphia and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at brian.balduzzi@faegredrinker.com.

Certain beneficiaries of inherited qualified retirement plan benefits (inherited QRPB) must be proactive in their planning due to a renewed expectation of annual required minimum distributions (RMDs) for calendar year 2025. Among other changes, the Setting Every Community Up for Retirement Act of 2019 (the SECURE Act) substantially altered the distribution period for which beneficiaries of defined contribution plans – including, but not limited to, 401(k), 403(b), and individual retirement arrangement (IRA) accounts – must withdraw the plan benefits.

Under the final regulations of the SECURE Act, published July 19, 2024, and effective as of Jan. 1, 2025, designated beneficiaries who do not qualify as eligible designated beneficiaries of an inherited QRPB must take annual RMDs for each year following the year of the decedent-plan-participant’s death. Importantly, such beneficiaries must also withdraw the entire balance of the inherited QRPB by the end of year 10 following the year of the decedent-owner’s death.

While the IRS has waived the penalties for a missed RMD for inherited QRPBs for calendar years 2021-2024, the 10-year distribution period for the inherited QRPBs remains unchanged. This can potentially result in both larger RMDs than expected and a greater distribution due at the end of year 10, for which clients and their advisers should plan now.

Inherited QRPBs and the SECURE Act

The SECURE Act eliminated the “stretch” distribution treatment for certain beneficiaries of inherited QRPBs from decedent-plan-participants who died on or after Jan. 1, 2020. Prior to the SECURE Act, a beneficiary who inherited QRPBs from a decedent-plan-participant who had attained his or her required beginning date could take RMDs annually over the longer of the life expectancy of such beneficiary or the decedent-plan-participant. The SECURE Act changed the rules so that only certain eligible designated beneficiaries (EDB) could take RMDs under the pre-SECURE Act rules. Generally, EDBs include a surviving spouse, a minor child, a beneficiary who is disabled or chronically ill, or a beneficiary who is not 10 years younger than the decedent-plan-participant. Any other individual designated on a decedent-plan-participant’s beneficiary designation form is deemed to be a designated beneficiary. Under the SECURE Act, inherited QRPBs must be distributed in full to the designated beneficiaries by the end of a 10-year period starting the year following the decedent-plan-participant’s death (the Ten-Year Rule). Therefore, if a decedent-plan-participant died on Nov. 1, 2020, the designated beneficiary would have to withdraw the entire inherited QRPB by Dec. 31, 2030.

SECURE Act Final Regulations

The SECURE Act final regulations confirm that a designated beneficiary must take annual RMDs for each year (one through nine) following the death of the decedent-plan-participant. This “at least as rapidly” rule provides that the designated beneficiary must calculate the RMD each year by dividing the inherited QRPB balance as of the end of the prior taxable year by the designated beneficiary’s life expectancy factor, using the IRS’s Single Life Expectancy Table. The application of this “at least as rapidly” rule with the Ten-Year Rule confused many clients and advisers in their review of the SECURE Act, so the IRS waived the excise tax of 50% assessed on missed RMDs for inherited QRPBs held by designated beneficiaries for each calendar year from 2021 through 2024. The SECURE Act 2.0 of 2022 also reduced this penalty to 25% for future years. Therefore, some designated beneficiaries chose not to take (or ignored) the annual RMDs for their inherited QRPBs.

For calendar year 2025, inherited QRPBs held by designated beneficiaries for decedent-plan-participants who died after Jan. 1, 2020, will be subject to their first RMD with an excise tax levied on any missed RMDs since the enactment of the SECURE Act. Without annual RMDs over the past few calendar years, account balances may have grown for the inherited QRPBs but the life expectancy factor for the designated beneficiaries has decreased. This generally means a greater RMD will be due.

More importantly, the period under the “at least as rapidly” rule remained unchanged, even when the excise tax for missed RMDs was waived. So, under the example above, the period for ultimate distribution remains Dec. 31, 2030, for a designated beneficiary’s inherited QRPB from a decedent-plan-participant who died Nov. 1, 2020. This may create income tax planning concerns for some designated beneficiaries and their advisers.

Case Example

Let’s assume Betty, age 75, died on April 1, 2022, after taking her RMD for 2022. She left her IRA solely to her son, Michael, who was 42 years old in 2022 and not chronically ill or disabled. Michael inherits the IRA and, because Betty attained her required beginning date at the time of her death, Michael must take annual RMDs from the IRA for each year starting in 2023, and must also withdraw the entire remaining balance by Dec. 31, 2032. Under the IRS Single Life Expectancy Table, in 2023, Michael, then 43, has a life expectancy factor of 42.9. If Betty’s IRA is valued at $5 million as of Dec. 31, 2022, Michael’s RMD for 2023 would have been about $116,550. Michael’s tax adviser correctly tells him that the IRS waived the excise tax on missed RMDs from inherited IRAs because Michael is a designated beneficiary. With that explained, Michael chooses not to take an RMD in 2023.

As of Dec. 31, 2023, the inherited IRA is now worth $5.5 million, and Michael’s new life expectancy factor for 2024 is 41.9, resulting in an RMD of about $131,265 for 2024. Once again, Michael’s tax adviser tells him that the excise tax is waived for any missed RMD for his inherited IRA, so Michael again does not take the RMD. The inherited IRA continues to grow, and by Dec. 31, 2024, the account balance is $6.05 million. In 2025, Michael’s life expectancy factor is now 41.0 and the RMD is about $147,561. In 2025, however, the IRS is no longer waiving the excise tax on any missed RMDs for inherited IRAs. Under the SECURE Act 2.0 of 2022, Michael would owe 25% of the value of a missed RMD, or about $36,890. Therefore, advisers should carefully review the annual RMD for 2025 with designated beneficiaries of inherited QRPBs.

More importantly, even if Michael takes his annual RMD for each calendar year from 2025 through 2032, he will need to withdraw the account balance from the inherited IRA as of Dec. 31, 2032. If we assume Michael takes only his annual RMDs during this period, and the account balance grows by 10% annually, Michael may have to take almost $10.5 million as the balance of the inherited IRA at the end of 2032, a costly income tax consequence depending on Michael’s state of domicile at that time. Michael’s advisers would add value to Michael’s income tax planning by projecting his other taxable income for these calendar years and analyzing how much more than his annual RMD Michael takes in each year to minimize the income taxes owed in the aggregate for the inherited IRA.

Next Steps

The change in the period for certain designated beneficiaries of inherited qualified retirement plan benefits under the SECURE Act of 2019 to take RMDs requires proactive tax planning. Advisers should help calculate the annual RMD that such beneficiaries must take and communicate the potential tax consequences over the remaining duration of the payout period of the inherited plans. This analysis and planning might help the beneficiaries minimize the overall income taxes owed from these inherited plans. 

Brian M. Balduzzi, JD, LLM (Taxation), CFP, is an attorney with Faegre Drinker Biddle & Reath LLP in Philadelphia and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at brian.balduzzi@faegredrinker.com.