IRS Delays RMD Rules Again
Episode 282 – The IRS, again, provides relief to individuals who inherited traditional IRAs and waives 2024 required minimum distributions for IRAs inherited in 2020 or later.
Transcript of Podcast Episode 282
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, IRS Delays RMD Rules Again.
On December 20, 2019, the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was enacted into law. The SECURE Act eliminated the Stretch IRA concept which allowed designated beneficiaries to inherit IRAs and take required minimum distributions (RMDs) over their lifetimes. For young beneficiaries, that allowed for many years and potentially many decades of continued tax-deferred growth.
For years 2020 and later, the remaining account balance of an inherited IRA was required to be distributed to designated beneficiaries by December 31, of the 10th calendar year after the date of death, unless the designated beneficiary qualified as an “eligible designated beneficiary,” a new term created by the SECURE Act. This is commonly known as the 10-year rule. Eligible designated beneficiaries include the spouse, a disabled or chronically ill beneficiary and a beneficiary who is not more than 10 years younger than the decedent IRA owner. Eligible designated beneficiaries can continue to take distributions from inherited accounts over their life expectancies, subject to certain other rules that we won’t discuss here.
The 10-year rule was widely interpreted to mean that when the participant died, the beneficiary did not need to take any distributions from the IRA until the end of the 10th year following the participant’s death.
On February 23, 2022, the IRS released proposed regulations containing a big surprise. The proposed regulations interpreted the 10-year rule as follows: If the plan participant died on or after the required beginning date (i.e., age 72), then under the 10-year rule, the designated beneficiary is required to take required minimum distributions in years one through 9, based on their life expectancy, and the remaining account balance in year 10. If the plan participant died prior to the required beginning date, then under the 10-year rule, the designated beneficiary is not required to take RMDs but must take the account balance out by the end of year 10.
On October 7, 2022, the IRS published Notice 2022-53. The Notice provided that final regulations will be coming soon and that the excise tax penalty for those who missed the 2021 or 2022 RMDs because of the most recent interpretation of the 10-year rule will be waived.
On December 29, 2022, the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) was signed into law. SECURE 2.0 raised the age to commence RMDs in 2023 to those who attained age 73. Provisions were also included to raise the age to 75 in years 2033 and later.
On July 12, 2023, the IRS published Notice 2023-54 providing relief to those who turned age 72 in 2023, delaying their required beginning date (i.e., the date they are required to commence RMDs) from April 1, 2024, to April 1, 2025. This had the effect of waiving RMDs for 2023.
On April 16, 2024, the IRS published Notice 2024-35, waiving penalties for missed RMDs in 2024 for IRAs inherited in 2023. Combined with the previous relief, the IRS has now waived penalties for missed RMDs for IRAs inherited in 2020, 2021, 2022 and 2023. That’s four consecutive years.
Are you confused yet?
Clearly, RMDs are a complicated subject with constant legislative and rule changes. If you believe that you may be subject to RMDs, make sure you consult with your tax advisor about your own situation.
Another factor to consider is that despite these IRS waivers, and despite the RMD rules, so long as you are over 59 ½ years and need retirement income, there could be a benefit to taking distributions from your IRAs anyway. Why? Because, since the Tax Cuts and Jobs Act (TCJA) of 2017 was enacted, we have enjoyed lower income tax brackets at more expansive income levels. The provisions of the TCJA, however, are due to sunset at the end of December 31, 2025. That means that in 2026, the income tax provisions will revert back to what they were prior to the TCJA, likely resulting in an increase in tax brackets at lower income levels. As a result, it may be possible to minimize the future tax impact by taking IRA distributions now at lower rates. Something else to discuss with your tax advisor.
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