Recently we shared new changes impacting retirement accounts beginning in 2025 as provisions of the SECURE 2.0 law continue to be phased in (See “SECURE 2.0: What’s new for 2025?”)
An additional key change for this year is related to the original SECURE law. Specifically, as part of the 10-year distribution rule, many beneficiaries of inherited retirement accounts and IRAs must begin taking (at least) a minimum distribution in 2025. This applies to most non-spouse beneficiaries who inherited an account after 2019.
Clarity on the 10-year rule
After several years of uncertainty, the IRS provided clarity last year on how distribution rules apply on inherited retirement accounts. Last fall we highlighted the details about the final regulations in our blog. (See “Unwinding the 10-year rule for inherited retirement accounts.”)
The regulations require that annual, minimum distributions be made on inherited accounts where the original owner passed away after reaching their required beginning date (RBD). In addition, the heir must fully distribute the inherited account within 10 years after the death of the account owner. In the case where the account owner dies prior to reaching the RBD, there is no annual distribution requirement. The inherited account only needs to be fully distributed by the end of the 10-year period. Spouses and other heirs are exempted from the 10-year rule and can stretch distributions based on their remaining life expectancy.*
Annual distributions must begin this year
While the IRS deliberated on the proposed regulations, relief from the annual distribution requirement applied for years 2021 through 2024.
Now, beginning in 2025, many beneficiaries subject to the 10-year rule must begin taking an annual minimum distribution, based on their life expectancy. The heir must consult the IRS single life expectancy table (See links to the tables at “Distributions from individual retirement arrangements”) to determine their life expectancy factor. Once determined, they can use that factor to calculate the appropriate distribution based on the value of the account at the end of the previous year. This is the only time the beneficiary consults the IRS table. For each subsequent year, the life expectancy figure is reduced by one.
Planning considerations to mitigate taxes
Heirs subject to the 10-year rule will want to carefully consider how to distribute inherited (traditional) retirement accounts based on several factors, including their personal tax situation. For some, that may entail equalizing distributions over the 10-year period to spread out the taxes that are due. Others may find a benefit from taking a larger share during a few specific years. For example, someone retiring in the middle of the 10-year period may want to take larger distributions after retiring if their income is lower. Depending on the age of the beneficiary, there may be other considerations when taking distributions, such as income limits impacting taxes on Social Security benefits or the amount of Medicare premiums.
Determining the distribution strategy can be complex
It’s important to consult with an advisor on the most beneficial strategy based on individual circumstances. For more information on managing inherited retirement accounts see our education piece “Distribution planning under the SECURE Act.”
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.
Copyright © 2024 Franklin Templeton. All rights reserved.
Endnote
__________________
*The required beginning date is generally April 1 of the year following the calendar year in which the account owner reaches age 73. An exception to the 10-year distribution rule applies to eligible designated beneficiaries (EDBs). These types of beneficiaries include spouses, individuals with disabilities or those who are chronically ill, beneficiaries not more than 10 years younger than the account owner, or minor children of the account owner (up to age 21 upon which the 10-year rule applies). These EDBs have the option to take distributions gradually each year based on their remaining life expectancy.
Ref. 3994810
