IRS BENEFICIARY RMD FINAL RULES

After more than two years, we might soon be getting answers from the IRS on several important unanswered questions concerning required minimum distributions (RMDs) for those who inherit IRAs or company plan accounts. The 2019 SECURE Act completely changed the RMD rules for many beneficiaries of retirement accounts. Previously, any individual living beneficiary could stretch RMDs over their lifetime. However, the new law said that most non-spouse IRA or plan beneficiaries who inherited after 2019 could no longer do the “stretch” and were instead subject to a 10-year payment rule. Only “eligible designated beneficiaries” (EDBs) could continue to do the stretch.

SECURE Act

The SECURE Act left many unresolved beneficiary RMD issues. The IRS issued proposed regulations in February 2022 that tried to clear things up, but in several respects only made things worse. Recently, the IRS said it expects final regulations to be in place in time for determining RMDs for 2025 and subsequent years. If the IRS is true to its word, then we should see the final rules by the end of 2024. What are the unresolved RMD issues that should be addressed in the final regulations?

The big one is whether certain beneficiaries subject to the 10-year rule must also take annual RMDs in years 1-9 of that period. In the 2022 proposed regulations, the IRS surprised everyone by saying that, in addition to the 10-year payout, annual RMDs are required during the 10-year term if the IRA owner had died on or after the date his RMDs were required to begin. (For IRA owners, that required beginning date is generally April 1 of the year after the year the owner turns age 73.)

Widespread Criticism and Confusion

The IRS position led to widespread criticism and confusion. Recognizing this, the IRS has excused annual RMDs for years 2021-2024 for all retirement account beneficiaries who inherited after 2019 and are subject to the 10-year payout. (The IRS has not excused lifetime RMDs, RMDs by EDBs, or RMDs by beneficiaries who inherited before 2020.) The IRS has not tipped its hand as to whether the final rules will require annual RMDs within the 10-year period starting in 2025.

2 Unique Situations to Consider

Hopefully, the final regs will also clarify whether the annual RMD requirement for years 1-9 of the 10-year period (in addition to the 10-year payout rule) applies in two other situations. The first is when a child reaches age 21 after having inherited a retirement account before that age from a parent who had not started RMDs. The other is when a “successor beneficiary” inherits from an EDB who had previously inherited from an original IRA owner who died before starting RMDs.

Finally, let’s hope the final guidance scraps a strange proposed rule that applies when an EDB inherits from a younger account owner who has already started RMDs. In that case, the beneficiary can use the account owner’s (longer) life expectancy in calculating RMDs, resulting in lower RMDs. So far, so good. But the rule goes further and requires the beneficiary to empty the account when the beneficiary’s – not the account owner’s – life expectancy runs out. This rule would be almost impossible for elderly beneficiaries to comply with.

By Ian Berger, JD
IRA Analyst