IRS Eliminates 2024 RMDs for IRA Beneficiaries Subject to 10-Year Rule

IRA beneficiaries take note: On April 16, 2024, the Internal Revenue Service (IRS) released new tax guidance under Notice 2024-35 exempting individual retirement account (IRA) beneficiaries subject to the 10-year distribution rule from taking a required minimum distribution (RMD) in 2024. The new guidance essentially extends similar relief granted for 2021, 2022, and 2023. A final ruling on the matter is expected before the end of 2024.

Read on to walk through this complicated question and see if it applies to you or a family member.

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What is an RMD?

An RMD is the amount that account owners of certain types of tax-deferred retirement accounts must withdraw annually starting at age 73 for those who turned 72 after Dec. 31, 2022. The purpose of an RMD is to ensure that account owners withdraw a portion of their savings each year and pay taxes on those withdrawals to satisfy the IRS's tax requirements.

Failure to take the RMD if you’re in a category that requires it can result in a 50% penalty (excise tax) on the amount not withdrawn. (Note that under SECURE 2,0, that tax penalty can drop to 25%, possibly 10%, if you correct the mistake within two years. The IRS says: “The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD was required, but not taken.”)

Roth IRAs and traditional IRAs have different RMD rules. Roth IRA owners are not required to take RMDs during their lifetime as long as they are the original owners and the account was opened at least five years before the first distribution. However, beneficiaries of Roth IRAs are still subject to RMDs, including those who inherit the account under the 10-year distribution rule.

Traditional IRA account owners must take RMDs starting at age 73. Beneficiaries of traditional IRAs are also subject to RMDs, including those who inherit the account under the 10-year distribution rule.

What is the 10-year distribution rule?

The 10-year rule was enacted as part of the SECURE Act of 2019. It requires anyone who inherits an IRA from an owner who died after Dec. 31, 2019—and is not an “eligible designated beneficiary” (a group exempt from this rule)—to withdraw the entire balance of the inherited IRA within 10 years of the decedent’s death. If the death occurred in 2019 or earlier, the rule was five years.

Eligible designated beneficiaries are “the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner.” They must take RMDs using their or the original owner’s life expectancy, depending on certain rules, though they may instead elect to take distributions using the 10-year rule.

The deadline for making this choice is either Dec. 31 of the year the beneficiary must take the first RMD using life expectancy criteria or Dec. 31 of the 10th anniversary of the original owner’s death (if electing the 10-year rule), whichever comes earlier

Why did this rule change?

Before enactment of the 10-year rule, beneficiaries not in the “eligible designated” category could take RMDs over their life expectancy utilizing the “stretch” rule. The 10-year rule eliminated that possibility. Those who did not utilize the stretch rule were required to empty their inherited IRA within five years of the original owner’s death.

The 2019 SECURE Act was unclear about whether the 10-year rule required annual distributions, something SECURE 2.0 and other guidance have attempted to clarify by not imposing the 50% excise tax on beneficiaries who failed to take an RMD in 2021, 2022, 2023, and, now, 2024.Which IRA beneficiaries are affected?

Only beneficiaries who aren’t “eligible designated” are affected by the 10-year distribution rule. As stated above, exemptions are only made for:

• The owner’s surviving spouse.
• Any child of the owner under the age of majority.
• A disabled or chronically ill person.
• Someone younger than the original account owner by 10 years or less.

In most cases eligible designated beneficiaries can use their life expectancy or the decedent’s life expectancy, whichever is longer, to calculate the minimum amount that must be withdrawn each year. Nonexempt beneficiaries must utilize the 10-year distribution rule. Given the complexity of IRA rules, any beneficiary of an IRA should consult a trusted financial advisor and continue to watch for the final rule on inherited IRAs from the IRS.

How will the new rule affect beneficiaries?

While nonexempt beneficiaries will not receive life-expectancy withdrawals, they can increase their income via RMDs over 10 years, compared with the five years previously granted for those who did not utilize the “stretch” rule. It could be advantageous for them to take RMDs in low-income years and skip them in high-income years during the 10-year period as a tax-savings strategy.

What will happen to the RMD rule next year?

Based on the temporary relief provided by IRS Notice 2024-35, the final guidance expected this year should clarify the RMD requirements for nonexempt beneficiaries of inherited IRAs under the 10-year distribution rule.

The IRS anticipates that the final regulations will apply to RMDs for 2025 and later calendar years. The regulation will likely include SECURE 2.0’s further increase in the age at which RMDs must begin, raising it to 73 for participants who turn 72 after 2022 (and 75 for people who turn 74 after 2032).

The April notice allows IRA balances to continue to grow, which could lead to a more significant tax impact once a beneficiary account owner takes an RMD. You should, therefore, consider questions such as whether it may make more sense to spend down your inherited IRA sooner or take targeted voluntary RMDs. However, only a spouse beneficiary can convert all or a portion of the account to a Roth IRA.

TIME Stamp: New IRS guidance pauses inherited IRA RMDs

IRS Notice 2024-35 relieves IRA beneficiaries subject to the 10-year distribution rule of the need to take an RMD in 2024. It does so by eliminating RMDs in any year before the 10th year following the decedent's death. The new guidance gives recent beneficiaries greater flexibility in managing their inherited IRA and anticipates a final ruling on the matter by the IRS before the end of 2024.

Rules for inherited IRAs are complicated enough without the uncertainty these ongoing IRS rulings bring. Consult a trusted financial advisor and keep a watchful eye out for the promised final ruling from the IRS on RMDs for inherited IRAs.