The IRS just updated the mandatory minimum distribution (RMD) rules. 3 things everyone needs to know.

The federal government encourages retirement savings by offering a tax break for anyone who contributes to certain retirement accounts, such as a 401(k) or IRA. If you save money in a traditional tax-deferred retirement account, you can deduct the amount you entered on your tax return this year. That gives you more money to invest right now.

But ultimately Uncle Sam wants his tax revenue. You can’t defer taxes forever because the government imposes mandatory minimum distributions. Seniors must begin withdrawing funds from tax-deferred retirement accounts starting at age 70, and some inherited IRAs may also be subject to RMDs. And whenever you make a withdrawal from one of these accounts, you’ll have to pay the fees you deferred years ago.

The penalties for missing a required distribution can be quite steep. You can owe up to 25% of the amount you were supposed to withdraw if you don’t do it in time. And you’ll have to make the withdrawal and pay taxes on it anyway.

Recent legislation has resulted in several changes to the mandatory minimum distribution rules, and the IRS provided finalized regulations on how it will implement the updated legislation in July, clarifying several key points. Here are three things everyone needs to know.

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1. You must continue to make RMDs on an inherited IRA

If you inherited an IRA from someone who died after December 31, 2019, you may be subject to RMDs on that account.

The Secured Act changed the rules on inherited IRAs. Instead of being able to spread withdrawals over your lifetime, you now only have 10 years of newly inherited IRAs to deplete the account. There are exceptions for spouses, minor children, beneficiaries less than 10 years younger than the IRA owner, and disabled or chronically ill beneficiaries.

It was unclear, as written, whether someone who inherits an IRA subject to the 10-year rule must also take RMDs in years one through nine. The IRS waived the requirements for 2021 through 2024, but said it will begin enforcing RMDs on inherited IRAs starting in 2025. Anyone who inherited an IRA from an owner who was already taking RMDs will have to continue to receive annual distributions.

Although the RMD rule is not retroactive, the 10-year rule still applies to anyone who inherited an IRA in 2020 or later. So that means some beneficiaries will have to exhaust their entire legacy account by 2030 after making minimum withdrawals in 2025 through 2029.

Because beneficiaries must exhaust the account within 10 years, it often makes sense to withdraw a certain amount each year to reduce the overall tax burden. However, IRS regulations reduce the flexibility that beneficiaries would have previously had.

2. Older beneficiaries may receive lower RMDs

If you inherit an IRA from someone younger than you who has already started taking RMDs, you will need to continue taking RMDs from the newly inherited IRA. This can add an additional tax burden to your inheritance because you likely have RMDs to take from your own accounts.

New IRS regulations offer some relief to older beneficiaries. Instead of taking RMDs based on your own life expectancy, you may be able to take RMDs based on the life expectancy of the original owner. This results in a smaller distribution from the inherited account.

Additionally, since you are older than the original owner, you will not be subject to the 10-year rule mentioned above. As such, you can keep your withdrawals to a minimum throughout your lifetime. However, you will likely shift the tax burden to your beneficiaries, who may be subject to higher RMDs and the 10-year rule.

3. Anyone born in 1959 should plan to start RMDs at age 73

The Secure 2.0 Act raised the RMD age from 72 to 73 starting in 2023 and then raised it again to 75 in 2033. However, this created an interesting problem for anyone born in 1959. Because would turn 73 in 2032, they would have to take their first RMD by April 2033. But then, they would be 74 in 2033, which is below the RMD age. So do the kids of 1959 have to start taking RMDs at age 73 or 75?

The IRS has proposed a rule to clarify the Secure 2.0 Act waiver that would make the minimum required distribution age for them 73. The following table shows your RMD age based on the year you were born if the proposed rule takes effect.

Data source: IRS.

Note that you can defer your first required minimum distribution until April 1 of the following year. That said, the next distribution must occur by December 31st of that year, meaning that the delay in the first RMD will result in two distributions in one year. It often makes sense to take your first distribution in the year you reach RMD age to reduce your overall tax liability.