New Rules: Aggregating Year-of-Death RMDs
IRS Final Regulations on Year-of-Death RMDs
Today’s article focuses on an additional nuance of the year-of-death RMD—something created by the final regulations (released July 18, 2024) – that could make taking the year-of-death RMD a little clunky in some situations.
Understanding Aggregation Rules for Year-of-Death RMDs
Aggregation rules tell us that a living person with multiple IRAs can calculate the annual RMD for each account, and then take the total RMD from any combination of their IRAs. This ability to aggregate lifetime RMDs across multiple IRA accounts impacts how beneficiaries can divide what remains of a year-of-death RMD.
Handling Year-of-Death RMDs When No Distributions Were Taken
If no distributions were taken from any IRA in the final year of the IRA owner’s life, the math is straightforward. We calculate the year-of-death RMD for each IRA, and the beneficiary (or beneficiaries) of each specific IRA must take the year-of-death RMD applicable to that account, from that account.
Complexity When Part of the Lifetime Distribution Was Taken
But what if an IRA owner of multiple IRAs with different beneficiaries took a lifetime distribution from one of his IRAs, thereby partially satisfying his own final aggregated RMD before death? We must now look to his total aggregated final year-of-death RMD and apply the shortfall to each of his IRAs. The shortfall is spread across all IRAs proportionally based on the total prior year-end balance of each account.
Example: Proportional Distribution of Year-of-Death RMD
Malcolm died in December of 2024 at the age of 75. At the time of Malcolm’s death, he owned two separate traditional IRAs. The prior-year-end balances of IRA #1 and IRA #2 (as of December 31, 2023) were $100,000 and $50,000, respectively. Based on the $150,000 total balance, Malcolm’s 2024 aggregated RMD was $6,098 ($150,000/24.6). Before his death, Malcolm had taken a $3,000 distribution from the smaller IRA #2 in 2024, and nothing from IRA #1. The remaining portion of his aggregated 2024 year-of-death RMD was $3,098.
How Proportional RMDs Affect Beneficiaries
Malcolm named his son John as beneficiary of the $100,000 IRA #1 and his daughter Susan as beneficiary of the $50,000 IRA #2. Based on the total prorated prior-year-end balances, beneficiary John and the larger IRA is responsible for 2/3 of the remaining year-of-death RMD ($2,065). This distribution must come from IRA #1. Beneficiary Susan is responsible for 1/3 of the remaining year-of-death RMD ($1,033). This distribution must come from IRA #2.
Why the New RMD Rules Can Be Clunky
As mentioned, this end result is a bit clunky, for a couple of reasons. Technically, by taking the $3,000 from the smaller IRA #2 while he was still alive, Malcolm satisfied the RMD for that specific account ($50,000/24.6 = $2,033). However, since Malcolm had not yet satisfied his total aggregated 2024 RMD, the shortfall is prorated over each of his IRAs.
Communication Is Key in Managing Year-of-Death RMDs
Communication is key to satisfying the prorated year-of-death distribution rule. What if the beneficiaries don’t know each other? What if beneficiaries and financial advisors are unaware of IRA accounts held with other custodians? This could result in certain beneficiaries taking more of the prorated year-of-death RMD than is required, and/or a shortfall in another account. But such a result may be unavoidable. Time will tell how this year-of-death RMD aggregation wrinkle plays out.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
FAQs About Year-of-Death RMDs and Aggregation Rules
What is a year-of-death RMD?
A year-of-death RMD is the required minimum distribution that an IRA owner must take in the year they die if they have not already taken their full RMD. The remaining RMD must be taken by the beneficiaries of the IRA.
Can IRA beneficiaries take the year-of-death RMD from any account?
No. After the IRA owner’s death, the year-of-death RMD must be taken from the specific IRA that each beneficiary inherits. If the owner had multiple IRAs, each beneficiary must fulfill the RMD from the inherited IRA, based on that account’s prior-year-end balance.
What happens if the IRA owner already took part of the RMD before dying?
If the IRA owner took part of their RMD before dying, the remaining shortfall must be calculated across all IRAs. The shortfall is then spread proportionally based on the prior-year-end balance of each account, and beneficiaries are responsible for their respective portions.
What if the beneficiaries don’t know about other IRAs or don’t communicate?
This can cause issues. If beneficiaries are unaware of other IRAs or don’t communicate, it could result in one beneficiary taking more than required while another IRA is left underfunded. Proper communication between beneficiaries and financial advisors is critical to prevent such mistakes.
How are the RMD shortfalls calculated for multiple beneficiaries?
The remaining RMD shortfall is spread proportionally across the IRAs, based on the prior-year-end balance of each account. For example, if an IRA owner had two IRAs with balances of $100,000 and $50,000, the shortfall would be divided 2/3 from the larger account and 1/3 from the smaller account.
What if a beneficiary fails to take the required RMD?
If a beneficiary fails to take the required RMD, they may face penalties. It’s crucial for beneficiaries to understand their responsibilities and ensure they take the correct amount by the required deadline to avoid IRS penalties.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.