Required Minimum Distributions

March 13, 2024

3700 / May an employer contribute to an IRA on behalf of an employee? May an employer or union establish an IRA for its employees or members?

<div class="Section1">Yes.<div class="Section1"> An employer may contribute to a traditional or Roth IRA on behalf of any eligible employee (or an eligible spouse in some cases). Any contribution made by the employer must be included in the employee’s gross income as compensation for the year for which the contribution was made.<a href="#_ftn1" name="_ftnref1">1</a> The employer’s contribution is treated as though made by the employee and subject to the maximum contribution limits applicable to individual retirement plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3659">3659</a>). If the contribution is made to a traditional IRA and the employee is eligible, the employee may take a deduction subject to the limits in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>.The employer deducts the contribution as salary or other compensation and not as a contribution to a retirement plan.<a href="#_ftn2" name="_ftnref2">2</a> Because amounts contributed by an employer are compensation to the employee, they are subject to FICA (Social Security tax), FUTA (federal unemployment tax), and income tax withholding.<a href="#_ftn3" name="_ftnref3">3</a> A trust that will be treated as an individual retirement account may be set up by an employer or association of employees for the benefit of employees, members, or employees of members (or the eligible spouses of any of the foregoing) if the trust meets all the requirements of an IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3641">3641</a>) and there is a separate accounting maintained for each employee, member, or spouse. A contribution made by an employer to a trust on behalf of an employee will be treated as a contribution to an individual retirement plan by such employee. The assets of an employer or association trust may be held in a common fund for the account of all individuals who have an interest in the trust. A trust may include amounts held for former employees or members and employees temporarily on leave. To qualify as an “association of employees” there must initially have been some nexus between the employees (e.g., a common employer, a common industry, etc.). An association may include members who are self-employed.<a href="#_ftn4" name="_ftnref4">4</a> Employer contributions to an IRA (or employer or association trust that is treated as an individual retirement account) do not need to meet the nondiscrimination rules associated with qualified plans. An employer generally cannot satisfy the coverage requirement for a qualified plan by contributing to an individual retirement account (including an employer or association trust treated as an individual retirement account) or individual retirement annuity on behalf of employees not covered under the qualified plan.<a href="#_ftn5" name="_ftnref5">5</a> The use of a payroll deduction program to fund employee IRAs will not subject the employer to Title I of ERISA (reporting and disclosure, participation, and vesting, etc.) where employer involvement is limited. The employer’s involvement is so limited where the employer maintains neutrality with respect to an IRA sponsor in its communications with its employees and so is not considered to have “endorsed” an IRA payroll deduction program. The employer must also make clear that its involvement in the program is limited to collecting the deducted amounts and remitting them promptly to the IRA sponsor, and that it does not provide any additional benefit or promise any particular investment return on the employee’s savings.<a href="#_ftn6" name="_ftnref6">6</a> An employer also may establish “deemed IRAs” for employees under a qualified plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3645">3645</a>). An employer may contribute amounts higher than the usual individual retirement plan limits by establishing a simplified employee pension program ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>) or a SIMPLE IRA (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>). </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 219(f)(5); see Prop. Treas. Reg. § 1.219(a)-2(c)(4). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 162; Prop. Treas. Reg. § 1.219-1(c)(4). <a href="#_ftnref3" name="_ftn3">3</a>.   H. R. Conf. Rep. 93-1280 (ERISA ’74) reprinted in 1974-3 CB 500; H. Rep. 93-807, reprinted in 1974-3 Supp. CB 367; IRC § 3401(a)(12)(C). <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 408(c); Treas. Reg. § 1.408-2(c). <a href="#_ftnref5" name="_ftn5">5</a>.   H. R. Conf. Rep. 93-1280 (ERISA ’74) reprinted in 1974-3 CB 499. <a href="#_ftnref6" name="_ftn6">6</a>.   Labor Reg. § 2510.3-2(d); see IB 99-1, 64 Fed. Reg. 32999 (6-18-99). </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

3696 / Who is a "designated beneficiary" for purposes of required minimum distributions from an IRA?

<div class="Section1">A designated beneficiary is an individual (or a trust meeting certain requirements, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>) designated as a beneficiary, either by the terms of the IRA plan document or by an affirmative election of the IRA owner (or such owner’s surviving spouse).<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> The designated beneficiary need not be specified by name to be a designated beneficiary so long as that beneficiary is identifiable under the terms of the IRA as of the determination date.<a href="#_ftn2" name="_ftnref2">2</a> For special rules governing contingent and successor beneficiaries, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>. For lifetime distributions, the identity and age of the designated beneficiary does not affect the IRA owner’s distributions unless the sole designated beneficiary is a spouse more than 10 years younger than the owner ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>). After 2020, the beneficiary’s status is determined as of the date of death. Under pre-2020 law, for purposes of after-death minimum distribution requirements, the final regulations required that a beneficiary determination be made as of September 30 of the year after the year of the IRA owner’s death (i.e., the determination date).<a href="#_ftn3" name="_ftnref3">3</a> This date was designed to provide ample time following the determination of the designated beneficiary(ies) to calculate and make the required distribution prior to the distribution deadline (i.e., the end of the calendar year following the owner’s death).<a href="#_ftn4" name="_ftnref4">4</a> Exceptions to the September 30 deadline applied if the account was payable as an annuity, or if a surviving spouse beneficiary died after the IRA owner but before distributions had begun. An individual who was a beneficiary as of the date of the owner’s death, but who was not a beneficiary as of September 30 of the following year (e.g., because the individual disclaims entitlement to the benefit or because the individual receives the entire benefit to which the individual is entitled before that date) was not taken into account for purposes of determining the distribution period for required minimum distributions after the owner’s death.<a href="#_ftn5" name="_ftnref5">5</a> A disclaiming beneficiary’s receipt of a required distribution, prior to disclaiming the benefit, in the year after death, will not result in the beneficiary being treated as a designated beneficiary for subsequent years.<a href="#_ftn6" name="_ftnref6">6</a> In a private letter ruling, the IRS also determined that a post death reformation of a beneficiary designation form that had inadvertently excluded a decedent’s children was effective to create a “designated beneficiary.”<a href="#_ftn7" name="_ftnref7">7</a> The children had been omitted as contingent beneficiaries on their father’s beneficiary designation due to a mistake by a bank employee, and not due to their fault. The children were therefore allowed to set up inherited IRAs after their father’s death. If a beneficiary is not an individual or a permitted trust, the IRA owner will be treated as having no designated beneficiary and the five year rule will apply ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>). An IRA owner’s estate may not be a designated beneficiary.<a href="#_ftn8" name="_ftnref8">8</a> This rule continues to apply even after the SECURE Act became effective in 2020. Generally, only an individual (not an estate or a trust) may be a designated beneficiary for required minimum distribution purposes. For example, if an IRA owner fails to name a beneficiary on the beneficiary designation form and the IRA plan document provides that in such a case benefits are paid to the owner’s estate, the estate beneficiaries will be barred from using the 10-year or life expectancy method, and the five year rule will apply.<a href="#_ftn9" name="_ftnref9">9</a> However, when a trust is named as a beneficiary and the special requirements for a “see-through” trust are met ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3907">3907</a>), the beneficiaries of a trust may be treated as if they had been designated as the beneficiaries of the IRA for required minimum distribution purposes (but not for purposes of “separate account treatment,” see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3697">3697</a>). In general, a valid see-through trust must satisfy the following four requirements: (1) the trust must be valid under state law, (2) the trust must be irrevocable, or must become irrevocable upon the death of the original account owner, (3) the beneficiaries of the trust who are to be beneficiaries of the IRA must be identifiable from the trust instrument itself, and (4) relevant documentation must have been provided to the plan administrator in a timely manner.<a href="#_ftn10" name="_ftnref10">10</a> In this case, the life expectancy of the oldest of all trust beneficiaries will be used to determine the minimum distribution requirements that apply after the death of the original account owner.<a href="#_ftn11" name="_ftnref11">11</a> <hr> Planning Point: Prior to 2020, when multiple beneficiaries are involved, there may have been a benefit to establishing separate accounts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3697">3697</a>), when available, or removing certain beneficiaries (via a disclaimer or lump sum distribution) between the date of the owner’s death and the determination date (i.e. September 30 of the year following owner’s death), as the minimum distribution requirements were determined based on the beneficiaries who still held an interest in the account as of the September 30th date. <hr> For example, prior to 2020, if an IRA owner died naming a charity and owner’s son as equal beneficiaries, the son would have been prevented from using his own life expectancy to determine required minimum distributions if the charity (a non-individual) still held an interest in the IRA as of the determination date. However, if the charity received a distribution from the IRA in full satisfaction of its interest prior to September 30, son would be considered a sole designated beneficiary and could use his own life expectancy to determine required minimum distributions. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.401(a)(9)-4, A-1. <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.401(a)(9)-4, A-1. <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.401(a)(9)-4, A-4(a). <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-3, A-3(a). <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.401(a)(9)-4, A-4(a). <a href="#_ftnref6" name="_ftn6">6</a>.   Rev. Rul. 2005-36, 2005-1 CB 1368. <a href="#_ftnref7" name="_ftn7">7</a>.   Let. Rul. 200616039. <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.401(a)(9)-4, A-3. <a href="#_ftnref9" name="_ftn9">9</a>.   Treas. Reg. § 1.401(a)(9)-4, A-3. <a href="#_ftnref10" name="_ftn10">10</a>.   Treas. Reg. § 1.401(a)(9)-4, A-5. <a href="#_ftnref11" name="_ftn11">11</a>.   Treas. Reg. § 1.401(a)(9)-5, A-7. </div></div>

March 13, 2024

3698 / What are an IRA trustee's reporting requirements with respect to required minimum distributions?

<div class="Section1">Two reporting requirements are imposed on IRA trustees: one to the IRA owner, and one to the IRS.<a href="#_ftn1" name="_ftnref1">1</a> For IRA owners, "[i]f a minimum distribution is required with respect to an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA as of December 31 of the prior year must provide a statement to the IRA owner by January 31 of the calendar year." The statement must satisfy one of the following alternatives: <blockquote>(1) It must inform the IRA owner of the amount of the required minimum distribution and the date by which it is required. The amount is permitted to be calculated assuming that the sole beneficiary of the IRA is not a spouse more than 10 years younger than the IRA owner, and that no amounts received by the IRA after December 31 of the prior year are required to be taken into account to adjust the value of the IRA as of December 31 of the prior year for purposes of determining the required minimum distribution.<a href="#_ftn2" name="_ftnref2">2</a> (2) It must inform the IRA owner that a minimum distribution is required with respect to the IRA, and offer to calculate the amount of the distribution on request by the owner.<a href="#_ftn3" name="_ftnref3">3</a></blockquote> The IRS has clarified that a trustee may use either of these two alternatives, or may use one alternative for some IRA owners and the other for other IRA owners.<a href="#_ftn4" name="_ftnref4">4</a> The reporting requirements apply only to lifetime distributions. The IRA owner is presumed not to have a spouse more than 10 years younger than the owner.<a href="#_ftn5" name="_ftnref5">5</a> No reporting is required for after death distributions (i.e. inherited IRAs) or for Roth IRAs.<a href="#_ftn6" name="_ftnref6">6</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Notice 2002-27, 2002-1 CB 814. <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. § 1.408-8, A-7 or A-8. <a href="#_ftnref3" name="_ftn3">3</a>. Notice 2002-27, clarified by Notice 2003-3. <a href="#_ftnref4" name="_ftn4">4</a>. Notice 2003-3, 2003-1 CB 258, Notice 2009-9, 2009-5 IRB. <a href="#_ftnref5" name="_ftn5">5</a>. Notice 2002-27, 2002-1 CB 814. <a href="#_ftnref6" name="_ftn6">6</a>. Notice 2002-27. </div>

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

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>