Relief for Certain IRA (Inherited Retirement Accounts) RMDs for Year 2024

In the initial months of 2022, the Internal Revenue Service (IRS) issued a draft of regulations concerning required minimum distributions (RMDs) to mirror amendments made under the 2019 Setting Every Community Up for Retirement Enhancement (URE) Act. In light of further modifications to RMDs under the SECURE 2.0 Act of 2022, the IRS has delayed the release of the final regulations. As an interim measure, the IRS has offered temporary relief and guidelines for certain RMDs from inherited retirement accounts for the year2024, with the expectation that the finalized regulations will be applicable from 2025.

Understanding RMDs

RMDs are mandatory withdrawals from individual retirement accounts (IRAs) and company-sponsored retirement accounts. If these are not made, a penalty is applied. In general, the owners of IRAs and employees with company retirement schemes must take RMDs during their lifetime.

RMDs typically start by April 1 of the year following the year in which an individual attains their RMD age. This age is 70½ for those born before July 1, 1949, 72 for those born from July 1, 1949, through 1950, 73 for those born from 1951 to 1959, and 75 for those born in 1960 or later. Employees who continue to work for the company that manages their retirement account may defer their RMDs until April 1 of the year following their retirement (assuming the plan permits this and the retirement date is later). This April 1 deadline is commonly known as the required beginning date (RBD).

Roth accounts are exempt from lifetime distributions, so owners of these accounts are always considered to have passed away before their RBD. Prior to 2024, these Roth account rules were applicable to Roth IRAs but not to Roth company retirement plans.

Beneficiaries are also obligated to take RMDs from an inherited retirement account (including Roth accounts) after the demise of an IRA owner or an employee.

Inherited IRAs and Retirement Plans

For IRAs and retirement plans inherited before 2020, RMDs could typically be spread over the life expectancy of a designated beneficiary. The SECURE Act altered this by stipulating that, in most instances, the entire account must be disbursed 10 years after the death of the IRA owner or employee if a designated beneficiary exists (and if the death occurred post-2019). However, there is an exception where an eligible designated beneficiary can take distributions over their life expectancy, and the 10-year rule does not apply until after their death.

Eligible designated beneficiaries include the spouse or minor child of the IRA owner or employee, a disabled or chronically ill person, and an individual who is not more than 10 years younger than the IRA owner or employee. The entire account also needs to be disbursed 10 years after a minor child attains legal adulthood (i.e., disbursed when they turn 31).

Many were taken aback when the proposed regulations issued in early 2022 suggested that yearly distributions are also required during the initial nine years of these 10-year periods. Many who responded to the proposed regulations requested relief from the IRS as RMDs had already been missed, and a penalty tax of 25% (50% prior to 2023) is levied when an RMD is not taken.

The IRS declared that it will not enforce the penalty tax under certain conditions where individuals affected by the RMD changes didn’t take yearly distributions in 2024 during one of the 10-year periods. For instance, relief might be granted if the IRA owner or employee passed away in 2020, 2021, 2022, or 2023 on or after their RBD, and the designated beneficiary who is not an eligible designated beneficiary didn’t take yearly distributions for 2021, 2022, 2023, or 2024 as required. Similar relief might be available if an eligible designated beneficiary passed away in 2020, 2021, 2022, or 2023, and yearly distributions were not taken in 2021, 2022, 2023, or 2024 as required.

RMD rules are complex, and the ramifications of errors can be severe. It is recommended to seek advice from a tax professional to understand how the rules apply to your specific circumstances.

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