Required Minimum Distributions

<div class="Section1"><em>Editor&rsquo;s Note: <em>See</em> </em> 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"><br /> <br /> Prior to 2020, the minimum distribution requirements that applied after the death of an IRA owner depended on whether the IRA owner died before (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>) or after (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3689">3689</a>) the required beginning date.<br /> <br /> Distributions generally were treated as having begun in accordance with the minimum distribution requirements under IRC Section&nbsp;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><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-10; Treas. Reg. &sect;&nbsp;1.408-8, A-1.<br /> <br /> </div></div><br />

<div class="Section1">The required minimum distribution (RMD) rules essentially require taxpayers to begin withdrawing funds from IRAs when they reach age 73 (72 for 2020-2022, 70&frac12; prior to 2020). The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer&rsquo;s life expectancy, determined using IRS actuarial data.<a href="#_ftn1" name="_ftnref1">¹</a> Despite this, there are ways that individuals can minimize their RMDs in the years prior to attaining their required beginning date (RBD) if they will have no immediate need for the funds at that time.<div class="Section1"><br /> <br /> Many individuals can reduce their RMDs by converting a portion of their traditional IRA funds into Roth funds. Roth IRAs have no minimum distribution requirements, so converting traditional IRA funds to Roth accounts will reduce the owner&rsquo;s RMDs. Unfortunately, if the taxpayer is still working, the taxpayer may still be in a high enough income tax bracket that the taxes generated by the rollover can be substantial (all pre-tax dollars rolled over from a traditional IRA to a Roth IRA are taxed at the owner&rsquo;s ordinary income tax rate).<br /> <br /> If the individual is still working, the taxpayer can also consider rolling the funds into a qualified plan (such as a profit-sharing or 401(k) plan) where distributions are not required until the later of the year the taxpayer reaches their RBD <em>or</em> the year the taxpayer retires. In this case, it becomes important that the taxpayer learn the rules of the qualified plan before making the rollover. Some plans do not accept rollovers, and others require that distributions begin at&nbsp;the individual&rsquo;s RBD regardless of the option to postpone until retirement.<br /> <br /> Importantly, both of these rollover moves must be made before the RMD requirements kick in&mdash;otherwise the individual will have to pay both the taxes associated with the RMD (which cannot be rolled over) and those generated by the rollover itself.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A taxpayer can also reduce RMDs by purchasing a qualified longevity annuity contract (QLAC) (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="556">556</a>)&mdash;which is a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the taxpayer reaches old age. The value of the QLAC is excluded from the account value when calculating the RMDs, though the taxpayer is limited to purchasing a QLAC with an annuity premium value equal to $200,000 (in 2023, up from $145,000 in 2022, $135,000 in 2020 and 2021). The SECURE Act 2.0 eliminated the rule that previously limited the value of a QLAC to 25 percent of the account&rsquo;s value.&nbsp; Further, the law modified the previous rule that limited the value of the QLAC to $145,000 by raising the cap to $200,000 (the $200,000 limit will be indexed for inflation in future years).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-8.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-8.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9); Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, Notice 2021-61.<br /> <br /> </div></div><br />

<div class="Section1">A penalty tax is imposed on the participant (IRA owner) if the amount distributed under an IRA for a calendar year is less than the required minimum distribution for the year. The penalty is equal to 25 percent of the amount by which the distribution made in the calendar year falls short of the required amount (the penalty was decreased from 50 percent of the missed RMD for tax years beginning in 2023 and thereafter under the SECURE Act 2.0).<a href="#_ftn1" name="_ftnref1">¹</a> The penalty amount is further reduced to 10 percent of the missed RMD if the taxpayer takes all of their missed RMDs and files a tax return paying the required tax and penalty amount before the earlier of (1) receiving a notice of assessment of the RMD penalty tax or (2) two years from the year of the missed RMD.</div><br /> <div class="Section1"><br /> <br /> The penalty generally will be imposed in the calendar year in which the amount was required to be distributed. If the distribution was the first required distribution, and thus was due by April 1 following the calendar year in which the IRA owner reached 73 years old (the required beginning date for 2023-2031), the penalty will be imposed in the calendar year when distributions were to begin even though the required distribution was technically for the preceding year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example:</em> Joan turned 73 on October 26 of 2023. Her first required minimum distribution for 2023 was due by April 1, 2024. Joan did not receive such amount by the April 1 due date. Consequently, Joan will owe a penalty equal to 25 percent of the amount that should have been distributed, which will be imposed on her 2024 tax return.</blockquote><br /> The penalty tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The SECURE Act 2.0 contained a new three-year statute of limitations in Section 313.  Under the law, the penalty only applies for the three years after the year of the missed RMD, after which the penalty cannot be enforced. The language of the SECURE Act leaves room for interpretation as to whether the statute of limitations can be enforced retroactively, and we have yet to receive IRS guidance on the issue.  Some experts argue that the three-year statute of limitations only applies to RMDs that are missed after the law was enacted late in 2022.  That would leave the penalty pending for RMDs missed before SECURE 2.0 became law.  However, the Tax Court has ruled that the SECURE 2.0 Act’s new six-year statute of limitations for excess contribution penalties should not be applied retroactively, making it reasonable to assume that the limitations period for missed RMDs will be interpreted similarly.<br /> <br /> <hr /><br /> <br /> The minimum distribution requirements will not be treated as violated, and, the 25 percent excise tax will not apply, where a shortfall occurs because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> To request a waiver of all or part of the 25 percent penalty tax imposed on RMD amounts not distributed on time, a statement of explanation should be filed with Form 5329 for each tax year there is or was a failure to properly take RMDs. The letter must explain the “reasonable error” that caused the failure and the reasonable steps that were taken to correct the error. Although the IRS has not issued guidance on what is a “reasonable error,” possible examples <em>may</em> include illness, death in the family, and notification of RMD not received from the financial institution.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 4974(a); Treas. Reg. § 54.4974-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. §§ 54.4974-2, A-1, 54.4974-2, A-6.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 4974; Treas. Reg. § 54.4974-2, A-7(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.401(a)(9)-8, A-8.<br /> <br /> </div>

<div class="Section1">Editor&rsquo;s Note: <em><em>See</em> </em> 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"><br /> <p style="text-align: center;"><strong>2024 Final RMD Regulations</strong></p><br /> Post-SECURE Act, most&nbsp;non-spouse account beneficiaries will be required to take distributions over a 10-year period unless they are classified as an eligible designated beneficiary (<em><em>see</em></em> 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.<br /> <br /> 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.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> 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.&nbsp; 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.<br /> <br /> <hr><br /> <p style="text-align: center;"><strong>Pre-SECURE Act Rules</strong></p><br /> 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&rsquo;s date of death.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (the &ldquo;determination date;&rdquo; i.e., September&nbsp;30th of the year after death, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>), the IRA owner&rsquo;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><br /> <br /> If the owner does have a designated beneficiary as of the determination date, the beneficiary&rsquo;s interest was distributed over the longer of (1) the beneficiary&rsquo;s life expectancy, calculated as described under the &ldquo;Life Expectancy Method,&rdquo; 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><br /> <br /> For the treatment of multiple beneficiaries and separate accounts, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(H)(i)(I), as added by PL 116-94, &sect;&nbsp;114.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(i).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(3); Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(a)(1).<br /> <br /> </div></div><br />

<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&rsquo;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"><br /> <br /> However, an individual does need to file Form&nbsp;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><br /> <br /> Moreover, a separate form also is required when nondeductible contributions are made to an IRA (<em><em>see</em></em> below).<br /> <p style="text-align: center;"><strong>Nondeductible Contributions</strong></p><br /> If an individual makes a nondeductible contribution to a traditional IRA for any year, the individual must report the following on Form&nbsp;8606:<br /> <blockquote>(1)&nbsp;&nbsp; The amount of the nondeductible contributions for the taxable year<br /> <br /> (2)&nbsp;&nbsp; The amount of distributions from individual retirement plans for the taxable year<br /> <br /> (3)&nbsp;&nbsp; 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<br /> <br /> (4)&nbsp;&nbsp; The aggregate balance of all individual retirement plans as of the close of the year in which the taxable year begins<br /> <br /> (5)&nbsp;&nbsp; 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)<br /> <br /> (6)&nbsp;&nbsp; Any other information as prescribed by the Secretary of the Treasury.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> Failure to file Form&nbsp;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&nbsp;8606 resulted in the taxpayer&rsquo;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><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;6058(d), 6058(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(o).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;6693(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; <em>Alpern v. Comm.</em>, TC Memo 2000-246.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;6693(b)(1).<br /> <br /> </div></div><br />

<div class="Section1">Amounts accumulated in an individual retirement account or annuity (&ldquo;IRA&rdquo;) must be distributed in compliance with the minimum distribution requirements.<a href="#_ftn1" name="_ftnref1">¹</a> The amount that must be distributed each year according to these rules is commonly referred to as the &ldquo;required minimum distribution&rdquo; (or RMD). For the calculation of lifetime distributions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>; for after-death distributions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>. Reporting requirements pertaining to IRA required minimum distributions are explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3597">3597</a>.<div class="Section1"><br /> <br /> Roth IRAs are not subject to the lifetime minimum distribution requirements, but are subject to the after-<em><em>death</em></em> distribution requirements explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>.<br /> <br /> Traditional IRAs, SEP IRAs, and SIMPLE IRAs (non-Roth IRAs) generally are subject to the same minimum distribution requirements that apply to qualified plans, with some variations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3892">3892</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3910">3910</a>).<a href="#_ftn2" name="_ftnref2">²</a> The required beginning date for lifetime distributions from non-Roth IRAs is April&nbsp;1 of the calendar year following the calendar year in which the individual attains age 73 (72 for 2020-2022, 70&frac12; prior to 2020) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>).<a href="#_ftn3" name="_ftnref3">³</a> Under pre-SECURE Act law, an individual reached age&nbsp;70&frac12; on the date that is six calendar months after his or her 70th birthday.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The 2020 CARES Act waived RMDs from IRAs and other defined contribution plans for calendar year 2020. The five-year rule is also determined without regard to 2020.<br /> <br /> While the CARES Act waived all RMDs for 2020, the law was enacted after some taxpayers had already taken their 2020 RMDs early in the year.&nbsp;For those who took RMDs early in the year, the 60-day rollover period had already expired.&nbsp;In response, the IRS announced that anyone who took a 2020 RMD was eligible&nbsp;to roll the funds back into their account penalty-free. The 60-day rollover period was extended through August&nbsp;31, 2020. Further, the rollover does not&nbsp;count toward the otherwise applicable &ldquo;one rollover per 12-month period&rdquo; rule or the restriction on rollovers for inherited IRAs.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(6), 408(b)(3), 401(a)(9).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-8, A-1, A-2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-8, A-3.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-2, A-3.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Notice 2020-51.<br /> <br /> </div></div><br />

<div class="Section1">If an individual owns more than one IRA, the required minimum distribution (RMD) must be calculated separately for each IRA, but the total for a category (Roth or non-Roth) may be taken from any one or more of the IRAs within the same category. This rule requires aggregation of amounts that an individual is required to take as the IRA owner and a separate aggregation for amounts that an individual is required to take as the designated beneficiary of a decedent’s IRA. Amounts taken as an IRA owner may not be aggregated with amounts taken as a beneficiary for purposes of meeting the minimum distribution requirements. Similarly, distributions from 403(b) contracts or annuities may not be aggregated with IRA distributions to meet the distribution requirements for either type of account.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <p style="padding-left: 40px;"><em>Example</em>: Mark, who is 75 years old, has two IRA accounts that he contributed to during his working years and an IRA that he inherited from his deceased father. One of his IRA balances equals $50,000 (IRA 1)<br /> and the other equals $75,000 (IRA 2); the inherited IRA has a balance of $25,000. Mark’s required minimum distribution from these accounts is as follows:</p><br /> <p style="padding-left: 80px;">IRA 1 = $1887</p><br /> <p style="padding-left: 80px;">IRA 2 = $2830</p><br /> <p style="padding-left: 80px;">Inherited IRA = $943.</p><br /> <p style="padding-left: 40px;">Mark must take, in total, $4717 ($1887+ 2830) from his IRAs. But he could take this amount from either IRA 1 or IRA 2 (or a combination of the two). The $943 required from the inherited IRA, however, must be taken only from that account.</p><br /> When an RMD is required during a calendar year, any amount distributed or withdrawn from the account will first be treated as the required distribution amount until the total required distribution has been satisfied. Consequently, such a distribution is not eligible for rollover.<a href="#_ftn2" name="_ftnref2">²</a> However, the minimum distribution requirement may be satisfied by a distribution from another IRA owned by the same individual.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Clients with multiple accounts may be required to take more than one distribution from these accounts. In other words, not all RMDs can be aggregated and taken from any account. Failure to take the correct RMD from the correct account can expose the client to significant tax liability. When calculating RMDs, IRAs (including SEP and SIMPLE accounts) are calculated separately, but the total RMD can be taken from any IRA. Company-sponsored 401(k)s must be calculated separately for each plan and the RMD must be taken separately from each specific 401(k) account. RMDs for 403(b) plans must be calculated separately and the total RMD for all 403(b) plans can be taken from any one or more of the 403(b) plans.<br /> <br /> <hr /><br /> <br /> In the event of a transfer from one IRA to another, the transferor IRA must distribute any amount required under these minimum distribution rules in the year of transfer—i.e. the transfer itself will not count as a distribution that satisfies these minimum distribution rules.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.408-8, A-9.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408-8, A-4.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.408-8, A-9.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.408-8, A-8.<br /> <br /> </div>

<div class="Section1"><em>Editor&rsquo;s Note:</em> 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"><br /> <br /> 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&rsquo;s death.&nbsp; 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.<br /> <br /> 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.&nbsp; These beneficiaries are permitted to take distributions based on their own life expectancy and are not limited by the 10-year rule.&nbsp; However, based on the &ldquo;at least as rapidly&rdquo; rule, the 2022 proposed regulations required a beneficiary to fully empty the account when the beneficiary&rsquo;s life expectancy ended (regardless of whether they were still living).&nbsp; While the rule was rarely insignificant if the beneficiary was younger, it penalized older beneficiaries.<br /> <br /> Under the 2024 final regulations, eligible designated beneficiaries can take distributions over their own life expectancy or the original owner&rsquo;s life expectancy, whichever is longer.&nbsp; These calculations are based on the IRS single life expectancy table.<br /> <br /> Spousal beneficiaries continue to be subject to more flexible pre-SECURE Act rules.&nbsp; Under regulations proposed in 2022, spousal beneficiaries would have been required to elect to treat the deceased spouse&rsquo;s IRA as their own by the later of (1) December&nbsp;31 of the year following the year of the owner&rsquo;s death or (2) the date they reached their required beginning date.&nbsp; The final regulations eliminated this deadline, giving surviving spouses added flexibility.<br /> <br /> However, surviving spouses are also subject to a new &ldquo;hypothetical RMD&rdquo; rule.&nbsp; This rule is designed to prevent older surviving spouses from avoiding their own RMD requirements.&nbsp; The IRS requires surviving spouses to take all RMDs required once they reach their RBD before executing the spousal rollover.&nbsp; Those RMDs are not eligible for rollover.<br /> <p style="text-align: center;"><strong>Pre-SECURE Act Rules</strong></p><br /> 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><br /> <p style="text-align: center;"><strong>Life Expectancy Method</strong></p><br /> 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><br /> <br /> To the extent that the interest is payable to a nonspouse beneficiary, distributions must begin by December&nbsp;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&rsquo;s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the owner&rsquo;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&rsquo;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&rsquo;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><br /> <br /> For the treatment of multiple beneficiaries, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3696">3696</a>.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The term &ldquo;stretch IRA&rdquo; 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 &ldquo;stretch&rdquo;) distributions over their individual life expectancies under the foregoing rules.<br /> <br /> Prior to the SECURE Act&rsquo;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.<br /> <br /> <hr><br /> <br /> A surviving spouse who is the sole designated beneficiary of an IRA generally may elect to treat the IRA as his or her own (<em><em>see</em> </em> 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 70&frac12; in earlier years).<a href="#_ftn8" name="_ftnref8">⁸</a> The payout period is the surviving spouse&rsquo;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&rsquo;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><br /> <br /> 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><br /> <p style="text-align: center;"><strong>Five Year Method</strong></p><br /> 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&rsquo;s death.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The five-year period was expanded to six years if 2020 was one of the five years.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408A-6, A-14(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(iii), Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-1(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-3.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-9.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-7(c)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(iv); Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-3.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(2).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(2).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Let. Rul. 200811028.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(ii); Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-1(a).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-2.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; IRC &sect;&nbsp;401(a)(9)(H)(ii).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em> Beginning in 2020, most inherited IRAs inherited by non-spouse beneficiaries must be depleted within 10 years of the original account owner&rsquo;s death under the SECURE Act.<div class="Section1"><br /> <br /> Inherited IRAs generally allowed an individual to &ldquo;stretch&rdquo; the tax-deferral associated with these accounts by providing for distribution of the account value over a period of years following the original account owner&rsquo;s death. Typically, the account beneficiary will take distributions over his or her lifetime or exhaust the account funds within five years of the original owner&rsquo;s death, which allows the account value to continue to grow and stretches the tax liability that accompanies the distributions over a period of years.<a href="#_ftn1" name="_ftnref1">¹</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3689">3689</a> for a discussion of the distribution rules that apply following the original account owner&rsquo;s death.<br /> <br /> Qualified plans (such as 401(k)s and profit-sharing plans), however, have always been subject to a different set of rules that do not allow the funds to be distributed over time. As a result, when a 401(k) is inherited, the funds will usually be distributed immediately in a single lump sum payment, resulting in an immediate tax liability for the beneficiary.<br /> <br /> If the designated beneficiary of an inherited 401(k) is an individual, prior to 2020, he or she had the option of rolling the inherited account funds into an IRA that would be treated as an inherited IRA, thus allowing the individual to stretch distributions over his or her life expectancy (or over a five-year period). The rollover had to be accomplished through a trustee-to-trustee transfer whereby the 401(k) plan administrator transfers the funds directly into a new IRA account that only holds the inherited 401(k) funds.<br /> <br /> If the original account owner has failed to name a beneficiary, the IRA will likely be paid out to his or her estate upon death&mdash;which will cause a loss of the tax-deferral benefits that can otherwise be realized with an inherited IRA. This is because the favorable rules that allow the account value to be distributed over time only apply if the account&rsquo;s designated beneficiary is an individual (or a trust, the beneficiary of which is an individual) that actually has a life expectancy.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, if the estate is the beneficiary of an inherited qualified plan (401(k)), the taxpayer loses the option of rolling the funds into an inherited IRA in order to maximize the tax-deferral potential.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.401(a)(9)-6, 1.408-8.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4.<br /> <br /> </div></div><br />

<div class="Section1">A designated beneficiary is an individual (or a trust meeting certain requirements, <em><em>see</em></em> 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&rsquo;s surviving spouse).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> 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, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>.<br /> <br /> For lifetime distributions, the identity and age of the designated beneficiary does not affect the IRA owner&rsquo;s distributions unless the sole designated beneficiary is a spouse more than 10&nbsp;years younger than the owner ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>). After 2020, the beneficiary&rsquo;s status is determined as of the date of death.<br /> <br /> 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&nbsp;30 of the year after the year of the IRA owner&rsquo;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&rsquo;s death).<a href="#_ftn4" name="_ftnref4">⁴</a> Exceptions to the September&nbsp;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.<br /> <br /> An individual who was a beneficiary as of the date of the owner&rsquo;s death, but who was not a beneficiary as of September&nbsp;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&rsquo;s death.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A disclaiming beneficiary&rsquo;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&rsquo;s children was effective to create a &ldquo;designated beneficiary.&rdquo;<a href="#_ftn7" name="_ftnref7">⁷</a> The children had been omitted as contingent beneficiaries on their father&rsquo;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&rsquo;s death.<br /> <br /> 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&rsquo;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.<br /> <br /> 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&rsquo;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 &ldquo;see-through&rdquo; 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 &ldquo;separate account treatment,&rdquo; <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3697">3697</a>).<br /> <br /> 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><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> 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&rsquo;s death and the determination date (i.e. September&nbsp;30 of the year following owner&rsquo;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&nbsp;30th date.<br /> <br /> <hr><br /> <br /> For example, prior to 2020, if an IRA owner died naming a charity and owner&rsquo;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&nbsp;30, son would be considered a sole designated beneficiary and could use his own life expectancy to determine required minimum distributions.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-1.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-3(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Rev. Rul. 2005-36, 2005-1 CB 1368.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Let. Rul. 200616039.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-3.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-3.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-5.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-7.<br /> <br /> </div></div><br />