On July 18, 2024, more than two years after releasing proposed required minimum distribution (RMD) regulations, the IRS has finally published final regulations on RMDs and beneficiary options. After receiving over 600 comments from interested parties and conducting a public hearing, the IRS has given us final regulations that are in many ways the same as the proposed regulations. Fortunately, the final regulations reflect some beneficial changes, which shows that the IRS did, in fact, take some of the public’s comments to heart.
Certain Pivotal Provisions Are Unchanged
The final regulations comprise 260 pages of text (along with an additional 36 pages of new proposed regulations interpreting certain SECURE 2.0 Act provisions). So clearly some items have changed. But two major changes from the proposed regulations remain in place.
The “Stretch IRA” Option Is Available to Fewer Beneficiaries
Before the proposed regulations became effective for 2020, most beneficiaries were able to take distributions over their remaining life expectancy. This concept is often known as the “stretch IRA” because payments are stretched over the beneficiary’s lifetime. Starting with IRA owner deaths in 2020, fewer beneficiaries are allowed to choose this option. The final regulations keep the rule that a beneficiary must be an eligible designated beneficiary, or EDB, to take advantage of the “stretch IRA” option. EDBs include
- The IRA owner’s surviving spouse,
- A minor child of the IRA owner,
- A disabled or chronically ill beneficiary,
- A beneficiary who is not more than 10 years younger than the IRA owner, or
- A beneficiary if the IRA owner died before 2020.
Non-EDBs that are individuals (versus entities such as estates or certain trusts) must generally distribute the entire inherited IRA balance by the end of the tenth year following the IRA owner’s death. This is known as the Ten-Year Rule.
The Ten-Year Rule . . . Plus RMDs for the First Nine Years
One new rule under the proposed regulations took nearly everyone by surprise. Because of existing statutory language in the Internal Revenue Code, the IRS felt bound to create this new requirement: If an IRA owner dies after reaching the point at which RMDs must be taken (and after January 1, 2020), the beneficiary must continue or accelerate those distributions. This is known as the “at least as rapidly” rule. Practically, this means that non-EDBs who are subject to depleting the IRA under the 10-Year Rule must also take RMDs based on their own single life expectancy during the first nine years of that 10-year period. Although this rule has caused a fair bit of confusion over the past several years, it remains in place in the final regulations.
The Final Regulations Contain Some Important Changes
Despite the overall contours of the final regulations remaining like the proposed regulations, some noteworthy revisions are worth mentioning. The following summary highlights certain changes but does not cover all the details.
Any beneficiary of an IRA may satisfy the year-of-death RMD. For IRA owners who die on or after their required beginning date and fail to take their full RMD before they die, the RMD amount not taken from that IRA may be withdrawn by any beneficiary of that IRA—rather than having to allocate a proportional share to each beneficiary.
Deadline for the automatic waiver of the excess accumulation penalty for year-of-death RMDs is extended. An automatic waiver of the penalty applies if the year-of-death RMD is withdrawn by any beneficiary by the later of 1) the tax filing deadline of the beneficiary (with extensions) for the year the IRA owner died, or 2) December 31 of the calendar year following the year of the IRA owner’s death. This extra time is especially helpful when an IRA owner dies at the end of the year but before the RMD is distributed.
Aggregated RMDs from multiple IRAs are ineligible for rollover or conversion. If an RMD is required for an IRA owner for a calendar year, the aggregate amount of the RMDs from all the IRA owner’s IRAs must be distributed and retained by the IRA owner before the remaining balance in any of the IRAs may be distributed and rolled over or converted to a Roth IRA (assuming that all other rollover/conversion eligibility requirements are satisfied).
Deadline for spouse beneficiary to “treat as own” eliminated. Spouse beneficiaries may now elect to transfer a decedent’s IRA to their own IRA (that is, treat it as their own) at any time, but only after any “hypothetical RMDs” have been distributed. Hypothetical RMDs are distributions that the spouse beneficiary would have had to take after reaching RMD age—but hadn’t taken because the 10-Ten Rule had been elected.
Spouse beneficiaries may elect to be treated as the IRA owner. The new rules get a bit complicated, but the essence is this: spouse beneficiaries who keep the decedent’s assets in an Inherited IRA (versus “treating as own”) are now allowed to be treated as if they are the IRA owner for RMD purposes. This means that they can use the longer Uniform Lifetime Table for taking RMDs rather than using the Single Life Expectancy Table. This approach would work well for a spouse beneficiary who is much younger than the decedent. For example, consider a spouse who is age 50 when the IRA owner dies. By leaving the assets in an Inherited IRA, the beneficiary can not only take death distributions (with no 10 percent penalty) instead of early distributions (if the assets were moved to the beneficiary’s own IRA). The beneficiary would also get to take RMDs using a longer life expectancy, resulting in smaller RMDs.
More Information to Come
As Mainstar Trust continues to analyze the final regulations—and as we get more federal guidance—we will share more details. For example, there have been some changes to how trust beneficiaries are treated. This alone could take several articles to cover. But rest assured that we will continue to bring you relevant information as it unfolds. Meanwhile, we invite you to reach out to our self-directed IRA experts for more insight on the new final regulations.