A Wish List for the IRS Beneficiary RMD Final Regulations
Anticipating the IRS Beneficiary RMD Final Regulations
After more than two years, we might actually 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.
Impact of the 2019 SECURE Act on RMD Rules
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. But 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.
Unresolved Issues from the 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 final rules by the end of 2024.
Unresolved RMD issues that should be addressed in the final regulations
The big issue 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 73.)
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.
Clarifications Needed for Specific Situations
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.
- Children Reaching Age 21: 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.
- Successor Beneficiaries: 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.
Scrapping the Proposed Rule for EDBs
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
Ed Slott and Company, LLC
Preparing for the IRS Beneficiary RMD Final Regulations
Understanding and preparing for these final regulations is crucial for effective personal financial management. Staying informed about changes in RMD rules can help beneficiaries make better decisions regarding their inherited retirement accounts. For more on IRA conversions and RMDs, contact us for a consultation.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
