Understanding the New RMD Rules for Non-Spousal Beneficiaries of Inherited IRAs - Part I
This is the first of a series of FEDZONE columns which will explain the most important changes to the RMD rules for non-spousal beneficiaries of inherited IRAs. Discussed in this column will be who takes the year-of-death traditional IRA RMD, how the year-of-death traditional IRA RMD can be divided among designated beneficiaries, and the deadline for taking the year-of-death traditional IRA RMD among designated IRA beneficiaries.
It is important to first review the rules regarding lifetime RMDs for traditional IRA owners. Lifetime RMDs for traditional IRAs commence (called the “required beginning date” or RBD) depending on when a traditional IRA owner was born. Note that it makes no difference with respect to the RBD whether the traditional IRA owner is still employed or fully retired.
For traditional IRA owners born before July 1, 1949, the first traditional IRA RMD is due by April 1 following the year the owner becomes age 70.5. Traditional IRA owners born between July 1,1949 and December 31,1950 have to take their first traditional IRA RMD before April 1 following the year they become age 72. Traditional IRA owners born between January 1,1951 and December 31,1959 have to take their first traditional IRA RMD before April 1 following the year they become age 73. Finally, any traditional IRA owner born after December 31,1959 has to take his or first traditional IRA RMD before April 1 following the year they become age 75.
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Once begun, traditional IRA RMDs must be withdrawn annually on a calendar year basis. The traditional IRA RMD deadline each year (after the first year) is December 31st of that year. If an RMD is missed, then effective January 1,2023 the penalty is 25 percent of the amount not taken. The penalty is further reduced to 10 percent if the missed RMD is corrected within two years. Note that the penalty for a missed RMD was 50 percent prior to the passage of SECURE Act 2.0.
If a traditional IRA owner dies before taking all or part of the annual RMD, whatever remains must still be withdrawn. Death provides no waiver for the traditional IRA RMD in the year of death. The RMD cannot be paid to the IRA owner’s estate unless the estate is the named beneficiary. If the deceased IRA owner did not take RMD before his or her death, then the IRA beneficiary must take that year’s RMD. While the process sounds straightforward, the year of death traditional IRA RMD can create confusion. The following are three key points to help traditional IRA beneficiaries understand the year of death traditional IRA RMD:
- Traditional IRA custodians will typically open an “inherited” (also known as a “death”) IRA for the designated traditional IRA beneficiary to transfer all assets to the “inherited” IRA and then pay out the year-of-death RMD from the inherited IRA. IRS Form 1099-R issued for this distribution shows the inherited IRA beneficiary’s Social Security number, and therefore the RMD amount must be included on the traditional IRA beneficiary’s personal tax return for the year of distribution. The distribution is not included on the deceased traditional IRA owner’s federal (and state) estate income tax return(s).
- If there are multiple traditional IRA beneficiaries, then the IRS does not care which beneficiary takes the year-of-death traditional IRA owner’s RMD. If multiple beneficiaries elect to divide the year-of-death RMD equally, they can do so. Or one beneficiary can choose a lump-sum payout that would satisfy the entire year-of-death RMD.
- The deadline for taking the year-of-death RMD is December 31 of the year of death. If the original traditional IRA owner dies late in the year and had not yet taken his or her RMD, then there is a strong possibility that the year-of-death RMD could be missed. Such situations have occurred so frequently that the IRS created an extension for missed year-of-death RMDs. The proposed SECURE Act 2.0 regulation established an automatic waiver of the penalty if the year-of-death RMD is taken by the beneficiary’s tax filing deadline, including extensions. The following example illustrates:
Cassandra, age 81, has a traditional IRA and designated her granddaughter Marlene, age 27, as the sole IRA beneficiary. Cassandra normally takes her annual traditional IRA RMD on December 20 of every year. Unfortunately, Cassandra died suddenly on December 15, 2022. Marlene is responsible for taking the 2022 traditional IRA RMD. But in her grief over her grandmother’s death, Marlene misses the December 31,2022 traditional IRA RMD deadline. Marlene is eligible for an automatic waiver of the traditional RMD missed penalty if she takes the 2022 year-of-death RMD by her 2022 tax filing deadline, including extensions.
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.