On June 3, 2024, we posted an article updating the status of regulations that have been proposed by the IRS since 2022. To read the article, please click here.
As a reminder, the prior article describes the elimination of the “stretch IRA” and implementation of the new requirement to withdraw all funds from an inherited IRA within 10 years following the deceased owner’s death. These rules do not apply to the following beneficiaries who are not subject to the 10-year full withdrawal requirement but must withdraw required minimum distributions (RMDs) from an inherited IRA over the beneficiary’s lifetime (or through age 21 in the case of a child of the decedent who must then make a full withdrawal by age 31):
- Surviving spouses [1].
- A child of the decedent under the age of 21.
- A beneficiary who is not more than 10 years younger than the decedent.
- An individual who is disabled or chronically ill.
In summary, the prior article explained the IRS’ position in its proposed regulations that beneficiaries who are not one of the four described above of an owner of an IRA [2] who dies on or after January 1, 2020, and who has attained his or her required beginning date (RBD) [3] are required to withdraw RMDs from the inherited IRA in years 1-9 following the IRA owner’s death.
As noted in the prior article, the IRS has waived the requirement for the affected beneficiaries to withdraw RMDs through the calendar year 2024. On July 19, 2024, the IRS published its final regulations in the Federal Register. In the regulations, the IRS has reaffirmed its position that certain beneficiaries of an IRA owner who died on or after the owner’s RBD must withdraw RMDs in years 1-9 following the IRA owner’s death. This requirement will be effective for calendar years beginning in 2025 and thereafter.
Although these regulations will be effective in 2025 and RMDs for prior years have been waived, if the IRA account holder had attained his or her RBD and died in years 2020-2023, the calculation of the RMDs beginning in 2025 will be calculated based on the beneficiary’s life expectancy in the year following the IRA account holder’s death and not as if the account holder had died in 2024 (in which case your life expectancy would be determined based on your age in 2025 when the regulations will become effective).
For example, assume that your mother, who died on March 1, 2022, was age 75 when she passed away and named you as beneficiary of her IRA. Your mother had reached her RBD and had been withdrawing RMDs from her IRA for several years prior to her death. It is clear that you will be required to withdraw all assets in your inherited IRA by the last day of the 10th year following your mother’s death or December 31, 2032. Under the IRS’ final regulations, you will also be required to withdraw RMDs, calculated over your life expectancy, for the full nine calendar years following your mother’s death, commencing in 2023 through 2031. Then in the 10th year following your mother’s death, all assets in the inherited IRA must be withdrawn no later than December 31, 2032.
The IRS waived the requirement in this example for you to withdraw RMDs in the years 2023 and 2024. This waiver will not affect your requirement to withdraw RMDs in the years 2025 through 2031. However, under the above example, the determination of your life expectancy is based on your age in 2023, the year following your mother’s death.
Assume in the above example that you attained age 57 in 2023, the year following your mother’s death. Under regulations issued by the IRS, your life expectancy at age 57 is 29.8 years. Under the IRS’ waiver, you were not required to withdraw RMDs in the years 2023 and 2024. However, in calculating your RMD in 2025, you will refer to your life expectancy at age 57 in 2023 and not to your life expectancy at age 59 in 2025. Because 2 years have expired since 2023, when calculating your RMD in 2025, the divisor will be 29.8 minus 2, which equals 27.8. If the value of your inherited IRA on December 31, 2024, is $100,000, your RMD in 2025 will be $3,597.12 ($100,000 ÷ 27.8).
The rules described in this article are complex. For questions concerning your RMD liability, contact Chuck Whetstine or your Frazer Ryan estate planning attorney.
[1] It is important to note that, in general, the RMD rules for a surviving spouse were not changed by Congress and the new 10-year rule does not apply to a surviving spouse. This article does not address in detail all of the alternatives available to a surviving spouse who inherits retirement funds from his or her deceased spouse.
[2] Reference to an individual retirement account (IRA) in this article also refers to individual account plans, which include 401(k), profit sharing, money purchase, 403(b), and 457(b) plans. Defined benefit pension plans are not subject to these new rules. In most instances, a beneficiary of an individual account plan will directly transfer the benefits in one of those plans to an “inherited IRA.” Accordingly, for the remainder of this article, reference will be made only to RMDs from an inherited IRA.
[3] For many years, the RBD was April 1 following the year in which an individual attained age 70½. The age of an individual has been increased several times over the last couple of years. Currently, the RBD is April 1 following the year in which an individual attains age 73. And, for individuals born after 1959, effective January 1, 2033, the RBD will be April 1 following the year in which an individual attains age 75.
