RMDs for Beneficiaries of Inherited Traditional IRAs

For the Fourth Consecutive Year, IRS Waives RMDs for Beneficiaries of Inherited Traditional IRAs

For the fourth year in a row, the IRS has provided relief on required minimum distributions (RMDs) for non-eligible designated beneficiaries (NEDBs) of inherited traditional IRAs who are subject to the SECURE Act’s 10-year payout rule. On April 16, 2024, the IRS issued Notice 2024-35 which excuses RMDs missed during 2024 for NEDBs subject to annual RMDs within the 10-year period. In order to get a better understanding of IRS Notice 2024-35, it is important to review the provisions of the SECURE Act passed into law in December 2019 and taking effect January 1, 2020.

The SECURE Act (known as SECURE Act 1.0) eliminated the “stretch” IRA for most traditional IRA beneficiaries and replaced it with a “10-year” rule. The “10-year rule” requires that the entire inherited IRA balance be withdrawn by the end of the 10th year after the death of the traditional IRA owner. SECURE Act 1.0 makes an exception for “eligible designated beneficiaries” (EDBs) who still qualify for the “stretch” IRA and are not subject to the “10-year” rule. EDBs includes: (1) Surviving spouses; (2) Minor children of the IRA owner until they are age 21; (3) Disabled individuals (under the strict IRS rules as to who is considered a disabled individual); (4) Chronically ill individuals; and (5) Individuals older than, or not more than 10 years younger than the IRA owner.

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In February 2022. the IRS proposed regulations that added a second requirement for beneficiaries who inherit IRAs from those traditional IRA owners who died after reaching their required beginning date (RBD) for taking traditional IRA RMDs. The RBD is April 1 of the year after the IRA owner becomes age 73. The IRS proposed regulations stated that this group of beneficiaries must take annual RMDs for years 1 through 9 of the 10-year term. This provision has been controversial and confusing and as a result, the IRS has waived mandatory traditional IRA RMDs for NEDB beneficiaries during years 1 of 9 of the 10-year mandatory withdrawal term. For 2021 and 2022, the relief came in IRS Notice 2022-53; for 2023, the relief came in IRS Notice 2023-54; and now during 2024 the relief came in IRS Notice 2024-35.

Which Inherited Traditional IRA Owners Do Not Get RMD Relief

IRS Notice 2024-35 does not affect lifetime RMDs. That means any traditional IRA owner who has reached his or her RBD must take their traditional IRA RMD for 2024. EDBs also do not qualify for this RMD relief. Since EDBs are not subject to the 10-year rule and subject to RMDs based on their life expectancy, their 2024 RMD must be taken.

In addition, the IRS relief found in Notice 2024-35 does not apply to RMDs for beneficiaries who inherited traditional IRAS before 2020. Those beneficiaries are subject to pre-SECURE Act 1.0 rules, which allow any traditional IRA beneficiary to take their RMDs based on their life expectancy.

The relief coming out of Notice 2024-35 applies to those beneficiaries who inherited traditional IRAs after 2019 and who were originally subject to annual RMDs within the 10-year period. The new (2024) IRS relief, combined with the prior IRS relief (during 2021, 2022 and 2023) means those traditional IRA beneficiaries will have no RMDs until at least 2025.

The following three examples illustrate who and who does not get RMD relief:

Example 1. Howard, age 75, owns a traditional IRA. Howard’s required beginning date was April 1, 2019. Howard has been subject to traditional RMDs since 2019. He took his IRA RMD in 2019, 2021, 2022, 2023 and now during 2024. Note that Howard skipped his traditional IRA RMD during 2020 because of the COVID epidemic and relief from the CARES Act.

Example 2. Julie, age 45, inherited a traditional IRA from her mother who died on August 5, 2018. Since Julie inherited her mother’s traditional IRA before January 1, 2020, Julie has been subject to RMDs for her inherited IRA every year since 2019 and continuing during 2024.

Example 3. Carlos, age 43, inherited a traditional IRA from his father who died on March 21,2020. Carlos is subject to the 10-year rule with respect to the deadline when he must withdraw the entire amount of his inherited IRA. Carlos’ father died at age 77 after his required beginning date. That means that Carlos is subject to a RMD during years 1 through 9 of his required 10-year payout period. However, because of IRA Notices such as 2024-35 and similar ones during 2021, 2022, and 2023, Carlos has not been required to pay any RMDs since his father’s passing and he inherited his father’s traditional IRA.

Finally, IRS Notice 2024-35 does not apply to Roth IRA beneficiaries subject to the 10-year rule because inherited Roth IRAs are not subject to RMDs for years 1 through 9 of the 10-year term, regardless of the age of the deceased Roth IRA owner. Roth IRAs have no lifetime RMDs. Therefore, any Roth IRA owner is always deemed to have died before reaching his or her required beginning date.

RMD Relief and Long-Term Tax Planning

While the IRS’ RMD relief over the last four years has been welcome news for affected traditional IRA beneficiaries, it is advisable for beneficiaries to not take advantage of the RMD relief and go ahead to take the RMDs (and more the RMD in some cases).

The reason for taking RMDs during 2024 (and during 2025 if IRS further extends this relief) is because individual federal tax rates remain low for 2024 and 2025. Unless Congress renews the Tax Cuts and Jobs Act of 2017, individual federal tax rates will go back up, effective January 1,2026 to the higher individual rates in effect before January 1, 2018. Delaying distribution from inherited traditional IRAs will also likely mean that inherited traditional IRA beneficiaries will face a larger tax bill at the end of the required 10-year payout period, a result of higher inherited traditional balances.

Final Regulations Coming Soon

The IRS in Notice 2024-35 also said that it expects to finalize its proposed SECURE Act 1.0 regulations issued in February 2022. This means that the final regulations will be effective starting in 2025.

This IRS relief shows how complicated the inherited IRA beneficiary RMD rules are. Affected inherited traditional IRA beneficiaries are encouraged to speak with their financial advisors in order to create a long-term plan for taking tax-efficient traditional IRA RMDs.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.