Relief for Certain RMDs from Inherited Retirement Accounts for 2024
In early 2022, the IRS issued proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022. In the meantime, the IRS has issued interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. The IRS anticipates that final RMD regulations, when issued, will apply starting in 2025.
RMD basics
Certain RMDs must be taken from individual retirement accounts (IRAs) and employer retirement accounts or a penalty will apply. IRA owners and employees with employer retirement plans must generally take RMDs during their lifetime.
RMDs are generally required to begin by April 1 of the year after the individual reaches RMD age. RMD age is 70ó (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). An employee still working for the employer maintaining an employer retirement account may be able to wait until April 1 of the year after the employee retires (if that is later and the plan allows it). The applicable April 1 date is often referred to as the required beginning date (RBD).
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Beneficiaries must also take RMDs from an inherited retirement account (including Roth accounts) after the death of an IRA owner or employee.
Inherited IRAs and retirement plans
RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary.
The SECURE Act changed these rules. In most cases, it now requires the entire account to be distributed within 10 years of the IRA owner’s or employee’s death. This applies when there is a designated beneficiary and the death occurred after 2019.
There is an important exception. An eligible designated beneficiary may still take distributions over their life expectancy. In that case, the 10-year rule does not begin until after the eligible designated beneficiary’s death.
Eligible designated beneficiaries include a surviving spouse or a minor child of the IRA owner or employee. They also include individuals who are disabled or chronically ill. An individual who is no more than 10 years younger than the IRA owner or employee also qualifies.
For minor children, special rules apply. The account must be fully distributed within 10 years after the child reaches the age of majority. This generally means the account must be distributed by age 31.
Proposed regulations issued in early 2022 surprised many taxpayers. They suggested that annual distributions are also required during the first nine years of most 10-year periods.
Many individuals had already missed required distributions by that time. Comments sent to the IRS requested relief. This was because a penalty tax applies when an RMD is missed. The penalty is 25% today and was 50% before 2023.
The IRS later announced penalty relief in certain situations. It stated that it will not assess the penalty tax when individuals failed to take annual distributions in 2024 during a 10-year period. Similar relief had already been provided for 2021, 2022, and 2023.
Relief may apply in specific circumstances. For example, it may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 on or after their required beginning date. It may also apply if a non-eligible designated beneficiary failed to take required annual distributions during the applicable years.
Relief may also be available when an eligible designated beneficiary died in one of those years. In that case, relief could apply if annual distributions were not taken during the required years following the beneficiary’s death.
The rules governing RMDs are complex. Mistakes can lead to significant penalties. You should speak with a tax professional to understand how these rules apply to your specific situation.
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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