Top
Bracing for the largest generational wealth transfer, the Internal Revenue Service (IRS) has raised the age at which workers must begin withdrawing funds from their qualified retirement accounts. The final rules (TD 10001; RIN:1545-BP82), released last month, amend the SECURE Act 2.0 permitting account holders to maintain 401(k), 403(b) and individual retirement account savings beyond the previous age limit of 70½ while eschewing hefty excise taxes punishing late withdrawal of those assets. The IRS also finalized new rules for non-spouse beneficiaries who inherit from original depositors who died in 2020 or later.
Baby Boomers and the Silent Generation are expected to pass down a combined $84.4 trillion in assets to younger generations over the next two decades. The preponderance of that wealth (63%) is coming from Boomers, who plan to leave $72.6 trillion to heirs, while $11.9 trillion will go to charity.1 As of December 31, 2022, the most recent data available, $37.8 trillion was held in U.S. retirement plans and accounts, of which $26.3 trillion was in employer-sponsored plans and $11.5 trillion was in Individual Retirement Accounts (IRAs).2 Retirement plan holdings include an array of financial assets, such as equities, securities, debt, mutual funds and claims on owed sponsor contributions.
Changes in required minimum distribution age enable workers to leave more cash in retirement accounts longer to help grow savings, part of sweeping legislative and regulatory efforts to whittle the potential retirement savings gap. Retirement advisers opposed the minimum distribution regulations when they were first proposed in 2022, claiming they would further obfuscate already murky tax code.
Staggered dates for required distributions
The new rules stagger required start dates for plan distributions: workers born before July 1, 1949, must begin distributions at 70½ years; those born between July 1, 1949, and Jan. 1, 1951, at 72; workers born between the start of 1951 and the first day of 1959, at 73; and those born on or after the first day of 1960 must start when they turn 75.
Distributions must occur during the lifetime of the employee and a designated beneficiary, according to the new rules. If the employee dies after distributions start, the remaining savings must be removed within ten years of their death or over the life expectancy of a beneficiary, beginning within a year of the worker's death.
Before 2020, IRA owners could leave their accounts to their heirs, who could then extend the required minimum distribution (RMD)3 over their lifetimes. The 10-year rule applies to many IRAs inherited after 2019.
A surviving spouse may be regarded as if they are the employee, waiting until the employee would have reached applicable age before making minimum distributions, and designate their own beneficiaries in case they die before the distributions begin.
The new rules apply to distributions starting January 1, 2025. Non-spouse beneficiaries of a person who died in 2019 or earlier may follow withdrawal schedules in place before the enactment of the SECURE Act in 2019 and the proposed IRS regulations published in 2022. A non-spouse beneficiary who inherits in 2020 or later may also choose to be regarded as an eligible designated beneficiary. Eligible non-spouse beneficiaries include people who are chronically ill or permanently disabled, a person who is not more than 10 years younger than the IRA owner or plan participant, as well as minor child of the deceased account holder.
Bottom line: Withdrawing from inherited IRA accounts may be complicated, and it is important to speak with your tax expert and financial planner to determine your best course of action. There is a lot to consider, especially if you are a non-spouse beneficiary. Many rules apply to withdrawing from an inherited IRA, and it's essential to understand your options and when to act under the new rules.
1 Cerulli Associates.
2 Congressional Research Service.
3 RMD is money that must be withdrawn annually from certain employer-sponsored retirement plans like 401(k)s and certain IRAs.
Disclaimer
Eaton Vance and Morgan Stanley do not provide legal, tax or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.
This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.
This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
This image indicates content designed specifically for Financial Advisors / Investment Professionals. This material is not to be used with the public.