IRS Waives 2024 RMDs for Select IRA Beneficiaries

The IRS has once again stepped in to provide assistance to taxpayers who have inherited retirement accounts in the wake of the substantial distribution changes made by the original SECURE Act and subsequent regulations. The current distribution regime governing non-eligible designated beneficiaries who inherit retirement accounts has proven to be both surprising and confusing. While the IRS has now offered relief for the fourth year in a row, taxpayers who are subject to the new rules should be advised with the big picture in mind—delaying their distributions can offer current-year tax relief, but it may not be best for every client when their overall tax liability is considered.

SECURE Act Inherited Account Changes: Background

Prior to 2020, retirement account beneficiaries could elect to stretch distributions from those inherited accounts over their own life expectancies. The SECURE Act eliminated that option for most non-spouse beneficiaries.

Post-SECURE Act, beneficiaries who inherit retirement accounts must empty those accounts within ten years of the original account owner's death unless the beneficiary qualifies as an eligible designated beneficiary (EDBs).

Under surprising IRS regulations that were proposed back in 2022, the IRS interpreted the rule to require annual RMDs for non-EDBs during years one through nine of the ten-year distribution period if the original account owner was already subject to the required minimum distribution rules at the date of their death. Most had expected that the beneficiary could elect to take the entire account balance in year ten if they choose.

IRS Waivers and Relief: Notice 2024-35

Since the proposed regulations were released, the IRS has provided relief for beneficiaries each year by excusing those RMDs. Notice 2024-35 once again waives 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. In previous notices, the IRS also excused these RMDs for 2021, 2022 and 2023 for account owners who died in 2020, but after their required beginning date, as well as for 2022 and 2023 for those who died in 2021, and in 2023 for those who died in 2022.

Under the new relief, beneficiaries of inherited IRAs, 401(k)s and 403(b) plans will not be subject to any mandatory distribution requirements until at least 2025, so they also will not be subject to the penalty tax for missed RMDs if they elect to make no withdrawals during the relief period. Qualified plans will also not risk disqualification by failing to make one of these distributions.

The notice only applies to beneficiaries of inherited IRAs. Taxpayers who are subject to the lifetime RMD rules are still required to take their RMDs from their own accounts during their lifetimes.

Should Clients Delay Their RMD Obligations?

Notice 2024-35 does indicate that the IRS may be ready to finalize the proposed regulations in the coming months. The IRS specifically states that final regulations should apply for tax years beginning on or after January 1, 2025. That means that beneficiaries of inherited accounts should prepare for enforcement of their post-SECURE Act RMD obligations.

Although RMDs for inherited IRA beneficiaries have technically been waived every year since 2020, account beneficiaries who are subject to the ten-year rule may wish to consider taking annual RMDs anyway. Income tax rates are currently historically low—and the current ordinary income tax rates are set to increase after 2025 absent Congressional action to extend the 2017 tax cuts.

The IRS has also not indicated whether it will extend the ten-year period to account for the years when RMD waivers were in effect. If they don’t, the beneficiary will be required to take larger RMDs to empty the account over a shorter period of time, meaning that the beneficiary could face a larger tax bill once the IRS begins enforcing their RMD obligations.

Conclusion

While IRS has once again offered a reprieve from the distribution requirements for inherited retirement accounts, clients should examine their individual tax situations when deciding whether to take an RMD during 2024. Notably, the IRS has not given any indication as to whether it might scrap the RMD requirement for years one through nine entirely, so taxpayers should prepare to eventually take those distributions.

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