On July 19, 2024, the IRS issued its final regulations on year-of-death RMDs (required minimum distributions), officially taking effect on Sept. 17, 2024.
These updates hold notable consequences for beneficiaries, including spouses, non-spouse individuals, and entities like trusts or charities. Depending on your category, you must strategically plan withdrawals and minimize tax liabilities by adhering to IRS guidelines. The goal is to maximize the value of your inherited retirement accounts.
Let’s unravel the details of these regulations and explore how they apply to different types of beneficiaries for proper management of your IRA RMDs.
What Are Required Minimum Distributions (RMDs)?
Required minimum distributions (RMDs) are the minimum amounts you must withdraw annually from specific retirement accounts, such as traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k)s, once you reach age 72.
Exceptions allow some workplace retirement plan participants to delay RMDs until they retire, provided they are not 5% owners of the sponsoring business. The RMD for each account is calculated by dividing the pre-December 31 balance by a life expectancy factor published by the IRS.
RMDs play a critical role in tax planning and compliance, especially when considering RMDs after death. Beneficiaries must navigate complex rules to handle distributions correctly and avoid penalties. Failure to exhaust the RMD can result in fines of up to 25% (or 10% if corrected within two years, per SECURE 2.0 Act), though the IRS may waive penalties for reasonable errors.
Rules for RMDs After Death
Upon the passing of a retirement account owner, the responsibility of managing and adhering to the required minimum distributions (RMDs) falls on the beneficiary, making compliance with these rules crucial for effective account management.
If the RMD for the year still needs to be completed, you, as the beneficiary, must ensure the full amount is withdrawn. Failure to do so could result in penalties.
However, you cannot donate the RMD as a Qualified Charitable Distribution unless you are over 70 ½. Additionally, you’ll need to provide the account custodian with the necessary paperwork, including a death certificate, to finalize distributions.
Regardless of when the original account holder dies during the year, the RMD obligation remains the same. For example, if the owner passes away before April 1 of the year following their 70 ½ birthday (their required beginning date, or RBD), no RMD is due for that year.
However, if the account owner passes away after April 1 of that year, they should have taken their first RMD. Any remaining RMDs become your responsibility to fulfill before the year ends.
Navigating RMD Rules for Non-Spouse Beneficiaries
Most non-spouse beneficiaries must follow the 10-year rule, which requires that inherited IRAs be fully liquidated within 10 years of the account owner’s death. This rule applies regardless of whether the original owner had started their RMDs.
You have flexibility in how you withdraw funds within this period, but mistakes can lead to significant tax consequences:
- Lump sum withdrawal: Taking the entire amount at once could result in a substantial tax bill, as the distribution is taxed as standard income.
- Regular withdrawals: Setting up systematic withdrawals over 10 years can help spread the tax burden.
- Flexible timing: You can take distributions any time during the 10 years, provided the account is fully liquidated by the deadline.
Understanding tax implications and distribution strategies is essential for navigating inherited wealth, including RMDs.
Special Rules for Eligible Designated Beneficiaries
Certain beneficiaries qualify for an exception to the 10-year rule, allowing them to use the life expectancy payout method for RMDs:
- Surviving spouses: They can treat the inherited IRA as their own or use their life expectancy to calculate distributions. They also have the option of transferring the funds to a new or existing IRA under their name within 60 days. If the deceased had begun RMDs, the spouse must continue annual distributions based on the original schedule.
- Minor children: RMDs are based on their life expectancy until adulthood (age 21). At that point, the 10-year rule applies.
- Disabled or chronically ill individuals: They can take RMDs based on their life expectancy.
- Individuals close in age to the deceased: Beneficiaries 1–10 years younger than the original account holder can also use their life expectancy for RMD calculations.
Navigating RMD rules can be complex, particularly for high-net-worth families managing significant inherited accounts. Working with a Certified Financial Planner® in Utah can help you make knowledgeable decisions, minimize tax liabilities, and ensure compliance with IRS regulations.
Secure Your Legacy: Master RMD Rules and Protect Your Wealth
Understanding the updated rules for RMDs is crucial for managing inherited retirement accounts effectively.
From the flexibility afforded to spouses and eligible beneficiaries to the strict 10-year rule for most non-spouse beneficiaries, knowing how these rules apply can help you minimize taxes and avoid costly penalties. Entities like trusts and charities face unique considerations, making tailored guidance even more essential.
Tencap Wealth Coaching is with you in navigating these complexities. To ensure your legacy and wealth are managed wisely, learn more about high-net-worth retirement planning strategies and 7 Reasons Why Our Advisory Services Are Worth The Fee.
Nick Carrigan
Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.
