Required Minimum Distributions

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 The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy, determined using IRS actuarial data.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

3688 / How are the minimum distribution requirements met when an IRA owner dies before 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"> Beginning in 2020, beneficiaries who are not classified as eligible designated beneficiaries (most non-spouse beneficiaries) must deplete an inherited retirement account within 10 years of the original owner’s death.  When the IRA owner died before their required beginning date, beneficiaries subject to the ten-year rule can take distributions as they choose throughout the 10-year period, so long as the account is emptied by the end of year 10. Post-SECURE act, one way an individual qualifies as an eligible designated beneficiary is if they are not more than ten years younger than the original account owner.  These beneficiaries are permitted to take distributions based on their own life expectancy and are not limited by the 10-year rule.  However, based on the “at least as rapidly” rule, the 2022 proposed regulations required a beneficiary to fully empty the account when the beneficiary’s life expectancy ended (regardless of whether they were still living).  While the rule was rarely insignificant if the beneficiary was younger, it penalized older beneficiaries. Under the 2024 final regulations, eligible designated beneficiaries can take distributions over their own life expectancy or the original owner’s life expectancy, whichever is longer.  These calculations are based on the IRS single life expectancy table. Spousal beneficiaries continue to be subject to more flexible pre-SECURE Act rules.  Under regulations proposed in 2022, spousal beneficiaries would have been required to elect to treat the deceased spouse’s IRA as their own by the later of (1) December 31 of the year following the year of the owner’s death or (2) the date they reached their required beginning date.  The final regulations eliminated this deadline, giving surviving spouses added flexibility. However, surviving spouses are also subject to a new “hypothetical RMD” rule.  This rule is designed to prevent older surviving spouses from avoiding their own RMD requirements.  The IRS requires surviving spouses to take all RMDs required once they reach their RBD before executing the spousal rollover.  Those RMDs are not eligible for rollover. Pre-SECURE Act Rules If an IRA owner dies before the required beginning date, distributions were made under either a life expectancy method or the five-year rule.<a href="#_ftn1" name="_ftnref1">1</a> After-death distributions from a Roth IRA were 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> Life Expectancy Method Under the life expectancy rule, if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life (or life expectancy) of the designated beneficiary ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>).<a href="#_ftn3" name="_ftnref3">3</a> To the extent that the interest is payable to a nonspouse beneficiary, distributions must begin by December 31 of the calendar year immediately following the year in which the IRA owner died.<a href="#_ftn4" name="_ftnref4">4</a> The nonspouse beneficiary’s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the owner’s death and is determined using the Single Life Table.<a href="#_ftn5" name="_ftnref5">5</a> In subsequent years, this amount is reduced by one for each calendar year that has elapsed since the year of the owner’s death.<a href="#_ftn6" name="_ftnref6">6</a> After the death of a nonspouse beneficiary, the payout period to the successor beneficiary will be determined using the deceased beneficiary’s remaining life expectancy (based on the age of the beneficiary in the calendar year of death) reduced by one for each calendar year that elapses thereafter.<a href="#_ftn7" name="_ftnref7">7</a> For the treatment of multiple beneficiaries, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>. <hr> Planning Point: The term “stretch IRA” does not appear in the Internal Revenue Code, but describes the practice of IRA distribution planning that successfully permits the beneficiaries (e.g., a surviving spouse and a child of the owner) to receive (or “stretch”) distributions over their individual life expectancies under the foregoing rules. Prior to the SECURE Act’s change, a younger beneficiary allowed for greater stretching given the longer life expectancy. When there are multiple beneficiaries, separate account rules must be followed for each designated beneficiary to use his or her own life expectancy for calculating RMDs. <hr> A surviving spouse who is the sole designated beneficiary of an IRA generally may elect to treat the IRA as his or her own (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3690">3690</a>). Unless this election is made, distributions to a surviving spouse beneficiary must begin by the later of the end of the calendar year immediately following the calendar year in which the owner died, or the end of the calendar year in which the owner would have reached age 73 (72 for 2020-2022 and 70½ in earlier years).<a href="#_ftn8" name="_ftnref8">8</a> The payout period is the surviving spouse’s life expectancy, based on his or her attained age in each calendar year for which a minimum distribution is required.<a href="#_ftn9" name="_ftnref9">9</a> After the surviving spouse dies, the payout period is that spouse’s remaining life expectancy, based on the age of the spouse in the calendar year of death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn10" name="_ftnref10">10</a> A designated beneficiary who does not elect the five-year method but fails to timely start distributions under the life expectancy method may be able to make up the missed RMDs and pay the 25 percent penalty (down from 50 percent pre-SECURE 2.0) on the missed distributions, rather than receive the entire balance within five years.<a href="#_ftn11" name="_ftnref11">11</a> Five Year Method Non-designated beneficiaries may be subject to the five-year distribution period even after enactment of the SECURE Acts. Under the five-year rule, the entire interest must be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).<a href="#_ftn12" name="_ftnref12">12</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="#_ftn13" name="_ftnref13">13</a> <hr> Planning Point: The five-year period was expanded to six years if 2020 was one of the five years.<a href="#_ftn14" name="_ftnref14">14</a> <hr> </div><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)-9. <a href="#_ftnref6" name="_ftn6">6</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(1). <a href="#_ftnref7" name="_ftn7">7</a>.   Treas. Reg. § 1.401(a)(9)-5, A-7(c)(2). <a href="#_ftnref8" name="_ftn8">8</a>.   IRC § 401(a)(9)(B)(iv); Treas. Reg. § 1.401(a)(9)-3, A-3. <a href="#_ftnref9" name="_ftn9">9</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(2). <a href="#_ftnref10" name="_ftn10">10</a>.   Treas. Reg. § 1.401(a)(9)-5, A-5(c)(2). <a href="#_ftnref11" name="_ftn11">11</a>.   Let. Rul. 200811028. <a href="#_ftnref12" name="_ftn12">12</a>.   IRC § 401(a)(9)(B)(ii); Treas. Reg. § 1.401(a)(9)-3, A-1(a). <a href="#_ftnref13" name="_ftn13">13</a>.   Treas. Reg. § 1.401(a)(9)-3, A-2. <a href="#_ftnref14" name="_ftn14">14</a>.   IRC § 401(a)(9)(H)(ii). </div></div>

March 13, 2024

3690 / What distribution requirements apply to an IRA that is inherited by a surviving spouse?

<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"> Editor’s Note: Under the SECURE Act 2.0, surviving spouses can elect to be treated in the same manner as the deceased spouse for account purposes beginning in 2024. That means required minimum distributions (RMDs) from the account will not begin until they would have begun for the deceased spouse (age 73 or 75, depending on the deceased spouse’s date of birth). Once RMDs begin under this option, they are calculated using the uniform life table (instead of the single life expectancy table, which is currently the table used to calculate RMDs for a beneficiary).  In cases where a surviving spouse dies before RMDs begin (based on the first-to-die spouse’s RMD start date), the surviving spouse’s beneficiaries will then be treated as they were beneficiaries of the original owner. That means it will be possible for those beneficiaries to be classified as eligible designated beneficiaries for purposes of the original SECURE Act’s RMD rules. While a surviving spouse may elect to treat an inherited IRA in the same manner as a non-spousal beneficiary (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a>), a surviving spouse of an IRA owner who is the sole beneficiary of an IRA and who has an unlimited right to make withdrawals from the IRA may also elect to treat the entire account as his or her own IRA. This election can be made at any time after the IRA owner’s death.<a href="#_ftn1" name="_ftnref1">1</a> Post-SECURE Act, surviving spouses qualify as eligible designated beneficiaries (EDBs), so the pre-SECURE Act distribution rules continue to apply. Under regulations proposed in 2022, spousal beneficiaries will be required to elect to treat the deceased spouse’s IRA as their own by the later of (1) December 31 of the year following the year of the owner’s death or (2) age 72 or 73 (their required beginning date). Under regulations proposed in 2022, spousal beneficiaries would have been required to elect to treat the deceased spouse’s IRA as their own by the later of (1) December 31 of the year following the year of the owner’s death or (2) the date they reached their required beginning date.  The final regulations eliminated this deadline, giving surviving spouses added flexibility. However, surviving spouses are also subject to a new “hypothetical RMD” rule to prevent older surviving spouses from avoiding their own RMD requirements.  The IRS requires surviving spouses to take all RMDs required once they reach their RBD before executing the spousal rollover. <hr> Planning Point: Surviving spouses should remember that under the regulations, the IRS requires the spouse to take RMDs before executing the rollover in some situations.  This rule is designed to prevent older surviving spouses from avoiding their own RMD requirements.  For example, if a spouse inherited an IRA when they were 70 years old, they could elect the 10-year rule.  If the deceased spouse had died before their required beginning date, the surviving spouse would not have to take annual RMDs in years one-10.  That could allow the 70-year old surviving spouse to avoid taking their own RMDs once they reach age 73 (to simply execute a spousal rollover of the entire inherited amount in year 10).  As a result, the IRS requires the survivor to take all RMDs required once she reaches age 73 before executing the spousal rollover (the regulations refer to these RMDs as "hypothetical RMDs").  Those RMDs are, of course, not eligible for rollover. Any minimum distribution that was required to be made to the deceased owner, but had not been made before the owner’s death, must be made to the surviving spouse in the year of death, but in all other respects, required distributions after the owner’s death are determined as if the surviving spouse were the owner.<a href="#_ftn2" name="_ftnref2">2</a> The surviving spouse will be deemed to have made the election to treat the IRA as his or her own if any required amounts in the account have not been distributed under the requirements for after-death required minimum distributions, or any additional amounts are contributed to the account or to an account or annuity to which the surviving spouse has rolled over the amounts.<a href="#_ftn3" name="_ftnref3">3</a> The result of a surviving spouse making the election to treat an IRA as his or her own is that the surviving spouse then will be considered the IRA owner for all other income tax purposes (for example, for purposes of the 10 percent penalty on early distributions).<a href="#_ftn4" name="_ftnref4">4</a> In the event that a surviving spouse beneficiary dies after the IRA owner, but before distributions to the spouse have begun, the 10-year rule, five-year rule and the life expectancy rule described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a> will be applied as though the surviving spouse were the IRA owner.<a href="#_ftn5" name="_ftnref5">5</a> As a result, the distribution period is determined depending upon the identity of the surviving spouse’s designated beneficiary, determined as of the date of the surviving spouse’s death. <a href="#_ftn6" name="_ftnref6">6</a>This provision does not allow a new spouse of the deceased IRA owner’s surviving spouse to delay distributions under the surviving spouse rules of IRC 401(a)(9)(B)(iv).<a href="#_ftn7" name="_ftnref7">7</a> <hr> Planning Point: A surviving spouse who is younger than 59½ years old and needs money should consider remaining a named beneficiary of the inherited IRA. As a named beneficiary, the surviving spouse can access the inherited IRA without incurring penalties–as compared to rolling the account into the spouse’s own IRA, where a distribution prior to 59½ could be subject to the 10 percent penalty. A surviving spouse who is younger than 73 years old and does not need money from the IRA should consider rolling the money into the spouse’s own IRA to delay RMDs until the spouse is 73, which allows the account to continue growing tax-deferred. <hr> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.408-8, A-5(a). <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408-8, A-5(a). <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.408-8, A-5(b). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.408-8, A-5(c); see Gee v. Comm., 127 TC 1 (2006). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 401(a)(9)(B)(iv)(II); Treas. Reg. § 1.401(a)(9)-4, A-4(b); see Let. Rul. 200436017. <a href="#_ftnref6" name="_ftn6">6</a>.   Treas. Reg. § 1.401(a)(9)-4,A-4(b). <a href="#_ftnref7" name="_ftn7">7</a>.   Treas. Reg. § 1.401(a)(9)-4,A-4(b). </div></div>

December 08, 2017

3686 / How are the minimum distribution requirements met during an IRA owner’s lifetime?

<div class="Section1">Distributions from a non-Roth Individual Retirement Account (“IRA”) or annuity must begin by April 1 of the year after the year in which the owner reaches their required beginning date, whether or not the owner has retired.<a href="#_ftn1" name="_ftnref1">1</a> Non-Roth IRA owners working beyond their required beginning date are not permitted to delay distributions until after retirement, even under an employer-sponsored plan such as a SEP or SIMPLE IRA. Unless the owner’s entire interest is distributed on or before the required beginning date, distributions of the balance must begin by that date and must, at a minimum, be distributed over the time period explained below.<div class="Section1"> No minimum distribution is required during life from a Roth IRA. <hr> Planning Point: RMDs were waived for 2020 only under the CARES Act. <hr> Uniform Lifetime Table Required minimum distributions from a non-Roth IRA during the owner’s lifetime are calculated by dividing the owner’s account balance by the applicable distribution period determined from the RMD Uniform Lifetime Table.<a href="#_ftn2" name="_ftnref2">2</a> The amount of an individual’s lifetime required distribution is calculated without regard to the beneficiary’s age, except in the case of a spouse who is the sole beneficiary and who is more than 10 years younger than the owner.<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: The IRS released new proposed life expectancy tables to be used in calculating required minimum distributions from both IRAs and employer-sponsored retirement plans. The new tables generally assume longer life expectancies and provide information needed to calculate RMDs for participants living to 120 (the previous tables stop at 115). The new tables will be used beginning in 2022. RMDs for 2020 were waived and the IRS delayed applicability of the new tables to give plan recordkeepers more time to make the administrative changes needed to implement the new tables. Starting in 2022, savers who have reached their required beginning date will now use the updated life expectancy tables. For many clients, the new tables mean that RMDs will be slightly smaller beginning in 2022. For example, the new factor for clients aged 70 is 29.1 (up from 27.4) and for clients who are age 71, the factor increases to 28.2 (up from 26.5). Individuals taking RMDs from inherited accounts will also be entitled to switch to the new life expectancy tables, as will those clients currently receiving substantially equal periodic payments. The new rules also provide a transition rule for beneficiaries of account owners who died before January 1, 2022. Under the rule, the initial life expectancy used to determine the distribution period is reset by using the new single life table. The transition rule can apply if the account owner died: (1) with a non-spouse eligible designated beneficiary, (2) after the required beginning date (RBD) and without a designated beneficiary or (3) after the RBD if the original owner was younger than the designated beneficiary.<a href="#_ftn4" name="_ftnref4">4</a> <hr> The distribution required by April 1 is actually the distribution required for the year in which the owner reaches their required beginning date. Distributions for each calendar year after the year the owner reaches their required beginning date (including the year of the required beginning date) must be made by December 31 of that year.<a href="#_ftn5" name="_ftnref5">5</a> For purposes of calculating minimum distributions from an IRA for a calendar year, the account balance is determined as of December 31 of the immediately preceding calendar year (i.e., the valuation calendar year).<a href="#_ftn6" name="_ftnref6">6</a> <blockquote>Example: Ms. Getman is an IRA owner born on July 1, 1950. She reached age 72 on July 1, 2022. Consequently, Ms. Getman’s required beginning date is April 1, 2023 (the year following the calendar year in which she turned 72). Assume that as of December 31, 2021, the value of Ms. Getman’s IRA was $265,000. Because Ms. Getman’s age in 2022 (the year for which her first distribution will be made) is 72, the applicable distribution period from the Uniform Lifetime Table is 25.6 years. Thus, the required distribution for calendar year 2022 is $10,352 ($265,000 ÷ 25.6). Assume that Ms. Getman receives this amount in 2023 shortly before her required beginning date of April 1, 2023. Assume that the value of Ms. Getman’s account balance as of December 31, 2022 is $254,648. This account balance is not reduced by the distribution received in early 2023. As a result, Ms. Getman’s required minimum distribution for 2023 (when she is 73, which is due by December 31, 2023, would be $10,309.64 ($254,648 ÷ 24.7). Receiving a distribution of more than the required minimum will not reduce the amount Ms. Getman is required to take in a subsequent year.<a href="#_ftn7" name="_ftnref7">7</a></blockquote> Spouse Beneficiary If the IRA owner’s spouse is the only designated beneficiary of the owner’s entire interest at all times during the distribution year, the owner may receive distributions over the longer of the distribution period determined from the Uniform Lifetime Table or the joint and survivor life expectancy of the owner and spouse.<a href="#_ftn8" name="_ftnref8">8</a> The joint and survivor life expectancy will provide a longer payout period only if the spouse is more than 10 years younger than the IRA owner. For details on the definition of “designated beneficiary,” see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>. Charitable IRA Rollover For tax years beginning in 2006 and thereafter, an IRA owner’s required minimum distribution can be reduced, within limits, by the amount of a qualified charitable distribution of up to $100,000, transferred directly from the taxpayer’s IRA to a qualified charity.<a href="#_ftn9" name="_ftnref9">9</a> This provision does not apply to SEP IRAs or SIMPLE IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8112">8112</a>). This charitable rollover provision was made permanent by the Protecting Americans Against Tax Hikes Act of 2015 (PATH Act). Distributions as Annuity Payments IRA required minimum distributions that are made as annuity payments are calculated in the same manner as required minimum distributions from defined benefit plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3896">3896</a>).<a href="#_ftn10" name="_ftnref10">10</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-3. <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.401(a)(9)-9, A-2. <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.401(a)(9)-5, A-4. <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-9(f). <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.401(a)(9)-5, A-1(b). <a href="#_ftnref6" name="_ftn6">6</a>.   Treas. Reg. § 1.408-8, A-6. <a href="#_ftnref7" name="_ftn7">7</a>.   Treas. Reg. §§ 1.408-8, A-6, 1.401(a)(9)-5, A-3. <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.401(a)(9)-5, A-4(b). <a href="#_ftnref9" name="_ftn9">9</a>.   IRC § 408(d)(8). <a href="#_ftnref10" name="_ftn10">10</a>.   Treas. Reg. §§ 1.408-8, A-1, 1.401(a)(9)-6. </div></div>