New IRS Regulations on Year-of-Death RMDs

The following is an excerpt from the IRS’ final regulations on year-of-death RMD:

“If an individual who is required to take a distribution in a calendar year dies before taking that distribution and has named more than one beneficiary, then any of those beneficiaries can satisfy the individual’s requirement to take a distribution in that calendar year, as opposed to each of the beneficiaries being required to take a proportional share of the unpaid amount.”

The IRS rule on year-of-death RMD can be beneficial in several situations. One such situation is when a charitable organization has been named as an account beneficiary. Cashing out the charity’s percentage could satisfy what remains of the final year RMD. Another situation is when one of the named beneficiaries needs cash. That beneficiary’s payout of the remaining final year RMD could potentially satisfy the balance of the year-of-death RMD, allowing the other beneficiaries to avoid an immediate distribution.

How Is the Year-of-Death RMD Distributed?

When a traditional IRA owner subject to RMD dies, the IRA custodian will typically open an “inherited” account for the named beneficiary(s) first, transfer the assets of the IRA to the inherited IRA account and then pay out the year-of-death IRA RMD from the inherited IRA account. Form 1099-R (Distributions from Pensions, Annuities, Retirement on Profit Sharing Plans, IRAs, etc.) for the distribution. The 1099-R issued for the distribution will include the beneficiary’s Social Security number on tax identification number and will be coded as a “death distribution” and is not subject to an early withdrawal penalty. The distribution will be on the beneficiary’s personal tax return, and not on the estate’s tax return or the decedent’s final tax return. As such, the beneficiary is responsible for paying any federal and state income taxes due on the year-of-death RMD. The following example illustrates:

Example 1. Grandpa Jones leaves his $200,000 traditional IRA to his four grandchildren. Each grandchild is to receive 20% of the IRA. Grandpa Jones names a charity as beneficiary of the final 20 percent. Grandpa Jones dies at age 87 without taking his final RMD of $200,000/14.4, or $13,889. His charity takes a full payout of its 20 percent of $200,000, or $40,000 beneficiary share. The $40,000 share more than satisfies Grandpa Jones’ year-of-death RMD, allowing the four grandchildren to avoid any immediate distributions.

Year-of-Death RMD Deadline and Penalty

Until now, the deadline for taking the year-of-death RMD was December 31 of the year of death. When death occurred late in the year (late November or in December) this tight deadline was often missed, adding unnecessary stress on IRA beneficiaries. Note that the penalty for missing any RMDs is 25 percent of whatever amount was not taken. This was reduced to 10 percent, if the missed RMD is corrected in a timely fashion.

The IRS’ proposed regulations provided an automatic waiver of the missed RMD penalty if the year-of-death RMD was taken by the beneficiary’s tax filing deadline, including extensions. This is definitely a welcome relief. However, the IRS went a step further in the final regulations extending the deadline to take the year-of-death RMD even further. Here is the summary of the final regulations with respect to year-of-death RMD deadline:

New IRS Regulations on Year-of-Death RMDs

“The final regulations extend the deadline for the beneficiary to take the missed required minimum distribution and be eligible to the automatic waiver. The new deadline is the later of the tax filing deadline for the taxable year that begins with or within the calendar year in which the individual died and the end of the following year.”

For most traditional IRA beneficiaries, this means the year-of-death RMD deadline is now December 31 of the year after the year of death. The following example illustrates:

Example 2. Grandma Mary, age 84, has a traditional IRA. Grandma Mary’s sole beneficiary of her IRA is her granddaughter Elizabeth, age 25. Grandma Mary normally takes her traditional IRA RMD on December 15 of every year. Grandma Mary died on December 10, 2023, five days before she took her 2023 traditional IRA RMD.

Elizabeth is responsible for taking the 2023 year-of-death IRA RMD. However, in her grief and confusion she failed to take it before December 31, 2023.. 

But under the final regulations, Elizabeth is eligible for an automatic waiver of the 25 percent missed RMD penalty if she takes the 2023 year-of-death RMD by December 31, 2024. Since the IRA custodian has already established an “inherited” IRA for Elizabeth and transferred Grandma Mary’s traditional IRA to Elizbeth’s inherited IRA, Elizabeth can simply take the year-of-death RMD from her inherited IRA sometime before December 31, 2024. She will receive a 2024 1099-R and owe federal and state income taxes on the distribution, reporting the distribution on her 2024 federal and state income tax returns.