Required Minimum Distributions

March 13, 2024

3687 / How are the minimum distribution requirements met after the death of an IRA owner?

<div class="Section1">Editor’s Note: See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a> for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries. The rules below apply to tax years beginning before 2020.<div class="Section1"> Prior to 2020, the minimum distribution requirements that applied after the death of an IRA owner depended on whether the IRA owner died before (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>) or after (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3689">3689</a>) the required beginning date. Distributions generally were treated as having begun in accordance with the minimum distribution requirements under IRC Section 401(a)(9)(A)(ii). If distributions irrevocably (except for acceleration) began prior to the required beginning date in the form of an annuity that meets the minimum distribution rules, the annuity starting date would be treated as the required beginning date for purposes of calculating lifetime and after death minimum distribution requirements.<a href="#_ftn1" name="_ftnref1">1</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.401(a)(9)-6, A-10; Treas. Reg. § 1.408-8, A-1. </div></div>

March 13, 2024

3683 / What can be done before the IRA required beginning date in order to minimize required minimum distributions?

<div class="Section1">The required minimum distribution (RMD) rules essentially require taxpayers to begin withdrawing funds from IRAs when they reach age 73 (72 for 2020-2022, 70½ prior to 2020). The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy, determined using IRS actuarial data.<a href="#_ftn1" name="_ftnref1">1</a> Despite this, there are ways that individuals can minimize their RMDs in the years prior to attaining their required beginning date (RBD) if they will have no immediate need for the funds at that time.<div class="Section1"> Many individuals can reduce their RMDs by converting a portion of their traditional IRA funds into Roth funds. Roth IRAs have no minimum distribution requirements, so converting traditional IRA funds to Roth accounts will reduce the owner’s RMDs. Unfortunately, if the taxpayer is still working, the taxpayer may still be in a high enough income tax bracket that the taxes generated by the rollover can be substantial (all pre-tax dollars rolled over from a traditional IRA to a Roth IRA are taxed at the owner’s ordinary income tax rate). If the individual is still working, the taxpayer can also consider rolling the funds into a qualified plan (such as a profit-sharing or 401(k) plan) where distributions are not required until the later of the year the taxpayer reaches their RBD or the year the taxpayer retires. In this case, it becomes important that the taxpayer learn the rules of the qualified plan before making the rollover. Some plans do not accept rollovers, and others require that distributions begin at the individual’s RBD regardless of the option to postpone until retirement. Importantly, both of these rollover moves must be made before the RMD requirements kick in—otherwise the individual will have to pay both the taxes associated with the RMD (which cannot be rolled over) and those generated by the rollover itself.<a href="#_ftn2" name="_ftnref2">2</a> A taxpayer can also reduce RMDs by purchasing a qualified longevity annuity contract (QLAC) (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="556">556</a>)—which is a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the taxpayer reaches old age. The value of the QLAC is excluded from the account value when calculating the RMDs, though the taxpayer is limited to purchasing a QLAC with an annuity premium value equal to $200,000 (in 2023, up from $145,000 in 2022, $135,000 in 2020 and 2021). The SECURE Act 2.0 eliminated the rule that previously limited the value of a QLAC to 25 percent of the account’s value.  Further, the law modified the previous rule that limited the value of the QLAC to $145,000 by raising the cap to $200,000 (the $200,000 limit will be indexed for inflation in future years).<a href="#_ftn3" name="_ftnref3">3</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.408-8. <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408-8. <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 401(a)(9); Treas. Reg. § 1.401(a)(9)-6, Notice 2021-61. </div></div>

March 13, 2024

3685 / Is there a penalty imposed for failure to comply with IRA required minimum distribution requirements?

<div class="Section1">A penalty tax is imposed on the participant (IRA owner) if the amount distributed under an IRA for a calendar year is less than the required minimum distribution for the year. The penalty is equal to 25 percent of the amount by which the distribution made in the calendar year falls short of the required amount (the penalty was decreased from 50 percent of the missed RMD for tax years beginning in 2023 and thereafter under the SECURE Act 2.0).<a href="#_ftn1" name="_ftnref1">1</a> The penalty amount is further reduced to 10 percent of the missed RMD if the taxpayer takes all of their missed RMDs and files a tax return paying the required tax and penalty amount before the earlier of (1) receiving a notice of assessment of the RMD penalty tax or (2) two years from the year of the missed RMD.</div> <div class="Section1"> The penalty generally will be imposed in the calendar year in which the amount was required to be distributed. If the distribution was the first required distribution, and thus was due by April 1 following the calendar year in which the IRA owner reached 73 years old (the required beginning date for 2023-2031), the penalty will be imposed in the calendar year when distributions were to begin even though the required distribution was technically for the preceding year.<a href="#_ftn2" name="_ftnref2">2</a> <blockquote>Example: Joan turned 73 on October 26 of 2023. Her first required minimum distribution for 2023 was due by April 1, 2024. Joan did not receive such amount by the April 1 due date. Consequently, Joan will owe a penalty equal to 25 percent of the amount that should have been distributed, which will be imposed on her 2024 tax return.</blockquote> The penalty tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.<a href="#_ftn3" name="_ftnref3">3</a> <hr /> Planning Point: The SECURE Act 2.0 contained a new three-year statute of limitations in Section 313. Under the law, the penalty only applies for the three years after the year of the missed RMD, after which the penalty cannot be enforced. The language of the SECURE Act leaves room for interpretation as to whether the statute of limitations can be enforced retroactively, and we have yet to receive IRS guidance on the issue. Some experts argue that the three-year statute of limitations only applies to RMDs that are missed after the law was enacted late in 2022. That would leave the penalty pending for RMDs missed before SECURE 2.0 became law. However, the Tax Court has ruled that the SECURE 2.0 Act’s new six-year statute of limitations for excess contribution penalties should not be applied retroactively, making it reasonable to assume that the limitations period for missed RMDs will be interpreted similarly. <hr /> The minimum distribution requirements will not be treated as violated, and, the 25 percent excise tax will not apply, where a shortfall occurs because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings.<a href="#_ftn4" name="_ftnref4">4</a> <hr /> Planning Point: To request a waiver of all or part of the 25 percent penalty tax imposed on RMD amounts not distributed on time, a statement of explanation should be filed with Form 5329 for each tax year there is or was a failure to properly take RMDs. The letter must explain the “reasonable error” that caused the failure and the reasonable steps that were taken to correct the error. Although the IRS has not issued guidance on what is a “reasonable error,” possible examples may include illness, death in the family, and notification of RMD not received from the financial institution. <hr /> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 4974(a); Treas. Reg. § 54.4974-1. <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. §§ 54.4974-2, A-1, 54.4974-2, A-6. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 4974; Treas. Reg. § 54.4974-2, A-7(a). <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.401(a)(9)-8, A-8. </div>

March 13, 2024

3689 / How are the minimum distribution requirements met when an IRA owner dies on or after the required beginning date?

<div class="Section1">Editor’s Note: See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a> for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries.<div class="Section1"> 2024 Final RMD Regulations Post-SECURE Act, most non-spouse account beneficiaries will be required to take distributions over a 10-year period unless they are classified as an eligible designated beneficiary (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>).<a href="#_ftn1" name="_ftnref1">1</a> The law did not change the rules applicable to surviving spouse beneficiaries. Under regulations finalized in 2024, designated beneficiaries will be required to take annual RMDs throughout the ten-year distribution period if the original account owner died after the required beginning date (it was originally expected that the beneficiary could elect to deplete the entire account in year ten if desired). The IRS provided relief and waived the annual RMD requirements for 2021, 2022, 2023 and 2024. <hr> Planning Point: Many clients took advantage of this relief to avoid increasing their 2024 taxable income given the uncertainty over the way the SECURE Act was drafted. However, in the final regulations, the IRS did not extend the original ten-year distribution period.  Clients must empty the account by year ten regardless of whether they took advantage of relief in years one-four. While retroactive RMDs are not required, those clients will end up with higher distributions (and increased tax liability) in years five-ten. <hr> Pre-SECURE Act Rules Prior to 2020, if the owner of an IRA died on or after the date minimum distributions have begun (i.e., the required beginning date), but before the entire interest in the IRA has been distributed, the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect at the owner’s date of death.<a href="#_ftn2" name="_ftnref2">2</a> If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (the “determination date;” i.e., September 30th of the year after death, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>), the IRA owner’s interest was distributed over his or her remaining life expectancy, using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn3" name="_ftnref3">3</a> If the owner does have a designated beneficiary as of the determination date, the beneficiary’s interest was distributed over the longer of (1) the beneficiary’s life expectancy, calculated as described under the “Life Expectancy Method,” in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a> or (2) the remaining life expectancy of the owner, determined using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn4" name="_ftnref4">4</a> For the treatment of multiple beneficiaries and separate accounts, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 401(a)(9)(H)(i)(I), as added by PL 116-94, § 114. <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 401(a)(9)(B)(i). <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(3). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(3); Treas. Reg. § 1.401(a)(9)-5, A-5(a)(1). </div></div>

March 13, 2024

3691 / What distribution requirements apply to an inherited IRA where the beneficiary is not the surviving spouse?

<div class="Section1">Editor’s Note: Under regulations finalized in 2024, designated beneficiaries are required to take annual RMDs throughout the ten-year distribution period if the original account owner died after the required beginning date (it was originally expected that the beneficiary could elect to deplete the entire account in year ten if desired). The final regulations will be effective prospectively, beginning in 2025.  Each year, the IRS has offered relief by excusing post-inheritance RMDs.  Most recently, Notice 2024-35 once again excused RMDs in 2024 for beneficiaries of accounts when the original owner died after their required beginning date and the beneficiary inherited the account in 2020, 2021, 2022 or 2023. <hr> Planning Point: Although RMDs for inherited IRA beneficiaries have technically been waived every year since 2020, these beneficiaries may wish to consider taking annual RMDs anyway.  Tax rates are currently at historic lows.  The IRS has also not indicated whether it will extend the 10-year period, meaning that the beneficiary could face a larger tax bill once the IRS begins enforcing their RMD obligations in 2025. <hr> Distribution requirements for an inherited IRA for a nonspouse beneficiary will depend on whether the IRA owner died before, on or after the required beginning date. The SECURE Act made substantial changes that eliminate the “life expectancy method” and “five-year method,” discussed under the heading below, for most account beneficiaries. Under the new law, most non-spouse account beneficiaries will be required to take distributions over a 10-year period following the original account owner’s death (the 10-year rule). The law did not change the rules applicable to surviving spouses who inherit retirement accounts. Exceptions also exist for disabled beneficiaries, chronically ill beneficiaries and children who have not reached “the age of majority” (i.e., eligible designated beneficiaries).  Proposed regulations provide that, for defined contribution plans, a child reaches the age of majority on their 21st birthday. One exception contained in the proposed regulations would continue to allow plans adopted prior to the effective date of the final regulations to continue to use their own definition of “age of majority.” A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary. The new 10-year rule also does not apply to an account beneficiary who is not more than 10 years younger than the original account owner. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for more on eligible designated beneficiary status. The new rule applies for tax years beginning after December 31, 2019 and applies to all defined contribution-type plans (the rules governing distributions from Roth IRAs were not changed). Pre-SECURE Act Law: Death Before Required Beginning Date Prior to 2020, if an IRA owner died before the required beginning date, distributions must be made under either a life expectancy method or the five-year rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>).<a href="#_ftn1" name="_ftnref1">1</a> After-death distributions from a Roth IRA also will be determined under these rules because the Roth IRA owner is treated as having died before the required beginning date.<a href="#_ftn2" name="_ftnref2">2</a> <hr> Planning Point: The CARES Act provided relief to IRA owners by eliminating the need to take 2020 RMDs. This relief also extends to beneficiaries of inherited accounts. For account beneficiaries subject to the five-year rule, the CARES Act provides that if 2020 is one of those five years, it is not counted—essentially extending the distribution period to six years. <hr> Under the life expectancy rule, if any portion of the interest was payable to, or for the benefit of, a designated beneficiary, that portion could be distributed over the life (or life expectancy) of the designated beneficiary, beginning within one year of the owner’s death.<a href="#_ftn3" name="_ftnref3">3</a> To the extent that the interest is payable to a nonspouse beneficiary, distributions had to begin by the end of the calendar year immediately following the calendar year in which the IRA owner died.<a href="#_ftn4" name="_ftnref4">4</a> The nonspouse beneficiary’s life expectancy for this purpose was measured as of the beneficiary’s birthday in the year following the year of the owner’s death. In subsequent years, this amount was reduced by one for each calendar year that has elapsed since the year of the owner’s death.<a href="#_ftn5" name="_ftnref5">5</a> A person who wishes to use the life expectancy method and failed to timely start distributions could make up the missed RMDs and pay the 50 percent penalty on the missed distributions.<a href="#_ftn6" name="_ftnref6">6</a> Under the five-year rule, the entire interest had to be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).<a href="#_ftn7" name="_ftnref7">7</a> To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the IRA owner’s death.<a href="#_ftn8" name="_ftnref8">8</a> Pre-SECURE Act Law: Death On or After Required Beginning Date If the owner of an IRA dies on or after the date distributions have begun (i.e., generally the required beginning date), but before the entire interest in the IRA has been distributed, the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect as of the owner’s date of death ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3689">3689</a>).<a href="#_ftn9" name="_ftnref9">9</a> If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (i.e., September 30 of the year after death) the IRA owner’s interest is distributed over the remaining life expectancy, using the age of the owner in the calendar year of death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn10" name="_ftnref10">10</a> If the owner does have a designated beneficiary as of the determination date, the beneficiary’s interest is distributed over the longer of (1) the beneficiary’s life expectancy, calculated as described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a><a href="#_ftn11" name="_ftnref11">11</a> or (2) the remaining life expectancy of the owner, determined using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn12" name="_ftnref12">12</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3690">3690</a> for the treatment of an IRA that is inherited by a surviving spouse. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.401(a)(9)-3, A-1(a). <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408A-6, A-14(b). <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 401(a)(9)(B)(iii), Treas. Reg. § 1.401(a)(9)-3, A-1(a). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-3, A-3. <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(1). <a href="#_ftnref6" name="_ftn6">6</a>.   Let. Rul. 200811028. <a href="#_ftnref7" name="_ftn7">7</a>.   IRC § 401(a)(9)(B)(ii); Treas. Reg. § 1.401(a)(9)-3, A-1(a). <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.401(a)(9)-3, A-2. <a href="#_ftnref9" name="_ftn9">9</a>.   IRC § 401(a)(9)(B)(i). <a href="#_ftnref10" name="_ftn10">10</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(3). <a href="#_ftnref11" name="_ftn11">11</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(1), (2). <a href="#_ftnref12" name="_ftn12">12</a>.   Treas. Reg. §§ 1.401(a)(9)-5, A-5(c)(3); 1.401(a)(9)-5, A-5(a)(1). </div></div>

March 13, 2024

3695 / Are inherited IRA funds exempt from the claims of a taxpayer’s creditors in bankruptcy?

<div class="Section1"> Whether or not the funds in an inherited IRA are exempt from the claims of a taxpayer’s creditors in bankruptcy has been an issue that many have disagreed upon in the past, but that the Supreme Court resolved in 2014.<a href="#_ftn1" name="_ftnref1">1</a> Under current law, the funds in an inherited IRA are subject to the claims of a beneficiary-debtor’s creditors in bankruptcy if the account is inherited by a beneficiary who is not the original account owner’s surviving spouse. Traditional and Roth IRAs that are not inherited accounts are typically exempt from bankruptcy claims up to an inflation-adjusted $1 million limit (which is adjusted every three years; the new exemption, updated April 1, 2022, is $1,512,350, and between April 1, 2019 and April 1, 2022, the exemption was $1,362,800) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3653">3653</a>).<a href="#_ftn2" name="_ftnref2">2</a> Prior to the Supreme Court’s review of the issue, in some jurisdictions (the Eighth Circuit, for example), inherited IRAs were exempt from bankruptcy claims based on the premise that the funds are retirement funds contained in otherwise tax-exempt vehicles. However, other courts had held that inherited IRAs lack the requisite retirement purpose. The rationale behind this line of decisions (most prominently found in the Seventh Circuit) was that inherited IRAs are subject to an entirely different set of rules than IRAs held by their original owners. Importantly, while a penalty is imposed on any non-inherited IRA funds that are withdrawn by the owner prior to a certain age, inherited IRA assets are liquid assets that can be accessed by the beneficiary at any time and without penalty. Further, the rules actually require that the inherited IRA funds be withdrawn within a relatively short time frame (either within five years, 10 years, or over the beneficiary’s life expectancy, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3690">3690</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a>) set without regard to the typical retirement age. This split among the circuits prompted the Supreme Court’s review of the issue. Though the rule is now settled with respect to nonspouse beneficiaries, taxpayers should note that the Supreme Court decision did not specifically address the issue of IRAs that are inherited by a surviving spouse (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3690">3690</a>). <hr> Planning Point: To provide beneficiaries of an inherited IRA with creditor protection, an IRA owner should consider naming a trust (or trusts) as a beneficiary of the IRA. In order to preserve the “stretch” options ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>), a “see-through” trust should be used ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3907">3907</a>). <hr> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Clark v. Rameker, 134 S. Ct. 2242 (2014). <a href="#_ftnref2" name="_ftn2">2</a>.   11 U.S.C. § 522. </div></div>

March 13, 2024

3699 / What IRS filing requirements does an individual retirement plan participant have to meet?

<div class="Section1">An individual who establishes an individual retirement plan does not have a filing requirement (other than what is reported on the individual’s 1040) for any year in which there is no plan activity other than a recharacterization or the making of contributions (other than rollover contributions) and permissible distributions.<div class="Section1"> However, an individual does need to file Form 5329 with their tax return if there is any tax due because of an early (premature) distribution (<a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/earlydist/Pages/3654-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>), excess contribution (<a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/elig/Pages/3648-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3669">3669</a>), or excess accumulation (<a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/rmds/Pages/3659-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3682">3682</a>).<a href="#_ftn1" name="_ftnref1">1</a> Moreover, a separate form also is required when nondeductible contributions are made to an IRA (see below). Nondeductible Contributions If an individual makes a nondeductible contribution to a traditional IRA for any year, the individual must report the following on Form 8606: <blockquote>(1)   The amount of the nondeductible contributions for the taxable year (2)   The amount of distributions from individual retirement plans for the taxable year (3)   The excess of the aggregate amount of nondeductible contributions for all preceding years over the aggregate amount of distributions that were excludable from income for such taxable years (4)   The aggregate balance of all individual retirement plans as of the close of the year in which the taxable year begins (5)   The amount of a traditional IRA that is converted into and recharacterized as a Roth IRA, or the amount in the same Roth IRA that is then converted back into and recharacterized as a traditional IRA (prior to 2018, the Roth recharacterization rules were generally eliminated for tax years beginning after 2017) (6)   Any other information as prescribed by the Secretary of the Treasury.<a href="#_ftn2" name="_ftnref2">2</a></blockquote> Failure to file Form 8606 will result in a $50 penalty per failure unless it is shown that the failure was due to reasonable cause.<a href="#_ftn3" name="_ftnref3">3</a> In one case, a failure to file a Form 8606 resulted in the taxpayer’s inability to appropriately document his basis in his nondeductible IRA; contributions were taxed a second time on distribution (<a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/dist/Pages/3650-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>).<a href="#_ftn4" name="_ftnref4">4</a> Overstatement of a nondeductible contribution is subject to a penalty tax of $100 per occurrence.<a href="#_ftn5" name="_ftnref5">5</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 6058(d), 6058(e). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 408(o). <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 6693(b)(2). <a href="#_ftnref4" name="_ftn4">4</a>.   Alpern v. Comm., TC Memo 2000-246. <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 6693(b)(1). </div></div>

March 13, 2024

3697 / Prior to the SECURE Act, what were the rules for determining required minimum distributions when there were multiple beneficiaries and separate accounts?

<div class="Section1">Editor’s Note: Beginning in 2020, non-spouse beneficiaries who do not qualify as eligible designated beneficiaries must generally deplete the account within 10 years of the original account owner’s death. Therefore, the life expectancy rules discussed below are no longer relevant unless the beneficiary qualifies as an eligible designated beneficiary (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). Post-SECURE Act, proposed regulations provide that in situations involving multiple designated beneficiaries, the life expectancy of the oldest beneficiary will be used (rather than simply using the shortest life expectancy).<div class="Section1"> If more than one beneficiary is designated as of the determination date ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>), the beneficiary with the shortest life expectancy (i.e., generally the oldest) will be the designated beneficiary for purposes of determining the distribution period.<a href="#_ftn1" name="_ftnref1">1</a> As an exception to the “oldest beneficiary” rule, if an individual account (including an IRA)<a href="#_ftn2" name="_ftnref2">2</a> is divided into separate accounts (as defined below) with different beneficiaries, the separate accounts do not have to be aggregated for purposes of determining the required minimum distributions for years subsequent to the calendar year in which the separate accounts were established (or date of death, if later).<a href="#_ftn3" name="_ftnref3">3</a> For purposes of Section 401(a)(9), “separate accounts” are portions of an employee’s benefit (or IRA) representing the separate interests of the employee’s beneficiaries under the plan as of his date of death. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the accounts. Once separate accounts have been established, the separate accounting can provide for separate investments in each account, with gains and losses attributable to such investments allocable only to that account. A separate accounting also must allocate any post-death distribution to the separate account of the beneficiary receiving it.<a href="#_ftn4" name="_ftnref4">4</a> <hr> Planning Point: When leaving an IRA to multiple beneficiaries, an owner may leave a fixed dollar (“pecuniary”) amount to one or more of them, with a “residual” gift to one or more other beneficiaries, or use “fractional”-type gifts for all beneficiaries. Although both methods are legal and acceptable, fractional gifts usually are preferable, for two reasons. First, if the owner uses a pecuniary gift (such as “pay $10,000 to Beneficiary A and the balance of the account to Beneficiary B”), the IRA provider may not know whether to give the “pecuniary” beneficiary just the flat dollar amount or to give that beneficiary the dollar amount plus or minus gains or losses that accrue after the date of death. The IRA provider’s documents and policies should spell this out, but many do not. Second, if the gift is truly a flat dollar amount, not adjusted for gains or losses occurring after the date of death, then that gift cannot qualify under the regulations as a “separate account” (see above) for minimum distribution purposes. Thus, the beneficiary of the flat dollar gift and the beneficiaries of the “residuary” gift will be considered beneficiaries of the same account. Natalie B. Choate, Esq., Bingham McCutchen. <hr> When separate accounts are established with different beneficiaries, the “applicable distribution period” is determined for each separate account disregarding the other beneficiaries only if the separate account is established no later than December 31 of the year following the decedent’s death.<a href="#_ftn5" name="_ftnref5">5</a> If this deadline is not met, separate accounts can be established at any time, but the distribution period in effect prior to the separation of the accounts (generally the life expectancy of the oldest beneficiary) will continue to be applied.<a href="#_ftn6" name="_ftnref6">6</a> <hr> Planning Point: If the foregoing requirements are not met (i.e., if separate accounts are not established by the deadline or to the extent the IRA proceeds were payable to one trust benefiting more than one individual), the IRA nonetheless may be segregated into separate IRA accounts, but the “applicable distribution period” will be the life expectancy of the beneficiary with the shortest life expectancy.<a href="#_ftn7" name="_ftnref7">7</a> If a trust is the beneficiary, separate account treatment is not available to the beneficiaries of the trust.<a href="#_ftn8" name="_ftnref8">8</a> Using the pre-2020 rules, the IRS has determined repeatedly that the establishment of separate IRA shares (i.e., creating separate IRAs titled in the name of the decedent for the benefit of the trust beneficiaries) did not entitle multiple beneficiaries of the same trust to use their own life expectancies as the distribution period.<a href="#_ftn9" name="_ftnref9">9</a> Where the trust established by the decedent to receive IRA proceeds included provisions for a subtrust benefiting the surviving spouse, the surviving spouse’s life expectancy was found to be controlling for all beneficiaries.<a href="#_ftn10" name="_ftnref10">10</a> In another instance, the IRS determined that where a father had failed to designate an IRA beneficiary, making his estate, which was left to his three children, the beneficiary, the decedent’s remaining life expectancy was controlling, although a subdivision of the IRA was permitted.<a href="#_ftn11" name="_ftnref11">11</a> The fact that the trust meets the requirements for a “see-through trust” ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3900">3900</a>) does not change this result.<a href="#_ftn12" name="_ftnref12">12</a> The IRS has privately ruled, however, that where separate individual trusts were named as beneficiaries, the ability of each beneficiary to use his or her life expectancy was preserved even though the trusts were governed by a single “master trust.”<a href="#_ftn13" name="_ftnref13">13</a> <hr> For details regarding contingent and successor beneficiaries, as well as other special rules, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3900">3900</a>. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.401(a)(9)-5, A-7(a). <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408-8, A-1(a). <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.401(a)(9)-8, A-2(a)(2). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-8, A-3. <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.401(a)(9)-8, A-2(a)(2). <a href="#_ftnref6" name="_ftn6">6</a>.   TD 8987, 67 Fed. Reg. 18988 (4-17-02). <a href="#_ftnref7" name="_ftn7">7</a>.   Treas. Reg. § 1.401(a)(9)-8, A-2(a)(2). <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.401(a)(9)-4, A-5(c). <a href="#_ftnref9" name="_ftn9">9</a>.   Let. Ruls. 200307095, 200317043, 200444033, 200432027, 200528031, 201503024. <a href="#_ftnref10" name="_ftn10">10</a>.   Let. Ruls. 200410019, 200438044. <a href="#_ftnref11" name="_ftn11">11</a>.   Let. Rul. 200343030. <a href="#_ftnref12" name="_ftn12">12</a>.   Let. Rul. 200317044. <a href="#_ftnref13" name="_ftn13">13</a>.   Let. Rul. 200537044. </div></div>

March 13, 2024

3682 / What are the minimum distribution requirements for individual retirement plans?

<div class="Section1">Amounts accumulated in an individual retirement account or annuity (“IRA”) must be distributed in compliance with the minimum distribution requirements.<a href="#_ftn1" name="_ftnref1">1</a> The amount that must be distributed each year according to these rules is commonly referred to as the “required minimum distribution” (or RMD). For the calculation of lifetime distributions, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>; for after-death distributions, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>. Reporting requirements pertaining to IRA required minimum distributions are explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3597">3597</a>.<div class="Section1"> Roth IRAs are not subject to the lifetime minimum distribution requirements, but are subject to the after-death distribution requirements explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>. Traditional IRAs, SEP IRAs, and SIMPLE IRAs (non-Roth IRAs) generally are subject to the same minimum distribution requirements that apply to qualified plans, with some variations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3892">3892</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3910">3910</a>).<a href="#_ftn2" name="_ftnref2">2</a> The required beginning date for lifetime distributions from non-Roth IRAs is April 1 of the calendar year following the calendar year in which the individual attains age 73 (72 for 2020-2022, 70½ prior to 2020) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>).<a href="#_ftn3" name="_ftnref3">3</a> Under pre-SECURE Act law, an individual reached age 70½ on the date that is six calendar months after his or her 70th birthday.<a href="#_ftn4" name="_ftnref4">4</a> <hr> Planning Point: The 2020 CARES Act waived RMDs from IRAs and other defined contribution plans for calendar year 2020. The five-year rule is also determined without regard to 2020. While the CARES Act waived all RMDs for 2020, the law was enacted after some taxpayers had already taken their 2020 RMDs early in the year. For those who took RMDs early in the year, the 60-day rollover period had already expired. In response, the IRS announced that anyone who took a 2020 RMD was eligible to roll the funds back into their account penalty-free. The 60-day rollover period was extended through August 31, 2020. Further, the rollover does not count toward the otherwise applicable “one rollover per 12-month period” rule or the restriction on rollovers for inherited IRAs.<a href="#_ftn5" name="_ftnref5">5</a> <hr> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 408(a)(6), 408(b)(3), 401(a)(9). <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408-8, A-1, A-2. <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.408-8, A-3. <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-2, A-3. <a href="#_ftnref5" name="_ftn5">5</a>.   Notice 2020-51. </div></div>

March 13, 2024

3684 / How are minimum distribution requirements calculated if an individual owns more than one IRA?

<div class="Section1">If an individual owns more than one IRA, the required minimum distribution (RMD) must be calculated separately for each IRA, but the total for a category (Roth or non-Roth) may be taken from any one or more of the IRAs within the same category. This rule requires aggregation of amounts that an individual is required to take as the IRA owner and a separate aggregation for amounts that an individual is required to take as the designated beneficiary of a decedent’s IRA. Amounts taken as an IRA owner may not be aggregated with amounts taken as a beneficiary for purposes of meeting the minimum distribution requirements. Similarly, distributions from 403(b) contracts or annuities may not be aggregated with IRA distributions to meet the distribution requirements for either type of account.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> Example: Mark, who is 75 years old, has two IRA accounts that he contributed to during his working years and an IRA that he inherited from his deceased father. One of his IRA balances equals $50,000 (IRA 1) and the other equals $75,000 (IRA 2); the inherited IRA has a balance of $25,000. Mark’s required minimum distribution from these accounts is as follows: IRA 1 = $1887 IRA 2 = $2830 Inherited IRA = $943. Mark must take, in total, $4717 ($1887+ 2830) from his IRAs. But he could take this amount from either IRA 1 or IRA 2 (or a combination of the two). The $943 required from the inherited IRA, however, must be taken only from that account. When an RMD is required during a calendar year, any amount distributed or withdrawn from the account will first be treated as the required distribution amount until the total required distribution has been satisfied. Consequently, such a distribution is not eligible for rollover.<a href="#_ftn2" name="_ftnref2">2</a> However, the minimum distribution requirement may be satisfied by a distribution from another IRA owned by the same individual.<a href="#_ftn3" name="_ftnref3">3</a> <hr /> Planning Point: Clients with multiple accounts may be required to take more than one distribution from these accounts. In other words, not all RMDs can be aggregated and taken from any account. Failure to take the correct RMD from the correct account can expose the client to significant tax liability. When calculating RMDs, IRAs (including SEP and SIMPLE accounts) are calculated separately, but the total RMD can be taken from any IRA. Company-sponsored 401(k)s must be calculated separately for each plan and the RMD must be taken separately from each specific 401(k) account. RMDs for 403(b) plans must be calculated separately and the total RMD for all 403(b) plans can be taken from any one or more of the 403(b) plans. <hr /> In the event of a transfer from one IRA to another, the transferor IRA must distribute any amount required under these minimum distribution rules in the year of transfer—i.e. the transfer itself will not count as a distribution that satisfies these minimum distribution rules.<a href="#_ftn4" name="_ftnref4">4</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. § 1.408-8, A-9. <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. § 1.408-8, A-4. <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.408-8, A-9. <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.408-8, A-8. </div>