Tax Facts
3905.1 / How does an IRA beneficiary satisfy the minimum distribution requirements if the original account owner failed to take their entire required distribution in the year of death when there are multiple beneficiaries?
Final regulations released in 2024 offer significant flexibility when an account owner names multiple beneficiaries. In these cases, when the original owner fails to take their full RMD prior to death, the beneficiaries can structure the RMD as they see fit.
In other words, the RMD can be distributed to any beneficiary.1 One single beneficiary could take the entire RMD or the RMD can be divided in any way among the multiple beneficiaries.
Planning Point: Because these distributions are fully taxable—and beneficiaries may be in different tax brackets. It may be beneficial to allocate more of the RMD to beneficiaries in the lowest tax brackets.
Under prior law, many believed that each beneficiary was required to take their proportionate share of the total RMD, based on each beneficiary’s interest in the decedent’s retirement accounts.
A special rule now applies in cases where a decedent names multiple beneficiaries and also has multiple accounts.2 For example, assume a situation where an individual has two IRAs. If they wish to provide for multiple beneficiaries without each knowing what the other received, they could simply name different beneficiaries to different accounts.
The IRS has created a special rule for these situations. The special rule applies if (1) the original owner dies before taking their full RMD for that year, (2) had multiple retirement accounts and (3) the beneficiary designations with for all of those accounts are not identical.
In this case, each of the individual’s accounts must distribute an amount that is proportionate to the entire account balance. That’s true regardless of whether the original owner had taken part of their RMD for the year from one of the accounts.
Example: Assume Peter died with two IRAs, one valued at $100,000 and the other at $25,000. He names his two children as equal beneficiaries to the $100,000 IRA. He names his two nephews as equal beneficiaries to the $25,000 IRA. He had not yet taken his annual RMD when he passed away. Based on a total account balance of $125,000, 80% of the RMD must come from the $100,000 IRA and 20% from the $25,000 IRA.
Planning Point: It is fairly easy for each beneficiary to calculate how much the others inherited. Because of this rule, clients with health issues or serious privacy concerns may wish to consider taking their RMD earlier in the year to reduce the risk that their account values and beneficiary choices will become generally known to all account beneficiaries.
Account beneficiaries who failed to take the original account owner’s RMD by December 31 would have been subject to the 25% penalty for failure to take the RMD on time. Recognizing that beneficiaries who inherit accounts late in the year may face administrative and other difficulties, the final regulations retain the automatic waiver of the excise tax that applies in the case of an individual who had a minimum distribution requirement in a calendar year and died in that calendar year before taking their RMD.
The final regulations offer even more flexibility by extending the deadline for the beneficiary to take the missed RMD and be eligible for the automatic waiver. The new deadline is the later of (1) the beneficiary's tax filing deadline for the tax year that begins with or within the calendar year in which the individual died and (2) December 31 of the following calendar year.3
1. Treas. Reg. §1.401(a)(9)-5(c).
2. Treas. Reg. §1.408-8 (e)(4).
3. Treas. Reg. § 54.4974-1.
In other words, the RMD can be distributed to any beneficiary.1 One single beneficiary could take the entire RMD or the RMD can be divided in any way among the multiple beneficiaries.
Planning Point: Because these distributions are fully taxable—and beneficiaries may be in different tax brackets. It may be beneficial to allocate more of the RMD to beneficiaries in the lowest tax brackets.
Under prior law, many believed that each beneficiary was required to take their proportionate share of the total RMD, based on each beneficiary’s interest in the decedent’s retirement accounts.
A special rule now applies in cases where a decedent names multiple beneficiaries and also has multiple accounts.2 For example, assume a situation where an individual has two IRAs. If they wish to provide for multiple beneficiaries without each knowing what the other received, they could simply name different beneficiaries to different accounts.
The IRS has created a special rule for these situations. The special rule applies if (1) the original owner dies before taking their full RMD for that year, (2) had multiple retirement accounts and (3) the beneficiary designations with for all of those accounts are not identical.
In this case, each of the individual’s accounts must distribute an amount that is proportionate to the entire account balance. That’s true regardless of whether the original owner had taken part of their RMD for the year from one of the accounts.
Example: Assume Peter died with two IRAs, one valued at $100,000 and the other at $25,000. He names his two children as equal beneficiaries to the $100,000 IRA. He names his two nephews as equal beneficiaries to the $25,000 IRA. He had not yet taken his annual RMD when he passed away. Based on a total account balance of $125,000, 80% of the RMD must come from the $100,000 IRA and 20% from the $25,000 IRA.
Planning Point: It is fairly easy for each beneficiary to calculate how much the others inherited. Because of this rule, clients with health issues or serious privacy concerns may wish to consider taking their RMD earlier in the year to reduce the risk that their account values and beneficiary choices will become generally known to all account beneficiaries.
Automatic Waiver for Beneficiaries
Account beneficiaries who failed to take the original account owner’s RMD by December 31 would have been subject to the 25% penalty for failure to take the RMD on time. Recognizing that beneficiaries who inherit accounts late in the year may face administrative and other difficulties, the final regulations retain the automatic waiver of the excise tax that applies in the case of an individual who had a minimum distribution requirement in a calendar year and died in that calendar year before taking their RMD.
The final regulations offer even more flexibility by extending the deadline for the beneficiary to take the missed RMD and be eligible for the automatic waiver. The new deadline is the later of (1) the beneficiary's tax filing deadline for the tax year that begins with or within the calendar year in which the individual died and (2) December 31 of the following calendar year.3
1. Treas. Reg. §1.401(a)(9)-5(c).
2. Treas. Reg. §1.408-8 (e)(4).
3. Treas. Reg. § 54.4974-1.
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