Although the required minimum distribution (RMD) rules have always been complicated, they tended to stay the same from year to year, which made them easier to follow. But that changed in 2019 with the passage of the SECURE Act, followed a few years later by the SECURE 2.0 Act, both of which brought significant changes to IRA owners and their beneficiaries.
In addition, the IRS released both final and proposed RMD regulations in 2024, which further changed the RMD rules. To avoid taxation and penalties, it’s important to understand these new rules, including those affecting beneficiaries of IRA owners who died before taking out their RMD for the year.
Who Must Satisfy an IRA’s Year-of-Death RMD?
If an IRA owner dies before distributing an RMD for that year, the beneficiaries must satisfy that RMD by taking appropriate distributions. Before the 2024 final RMD regulations were released, there was a presumption—reinforced by IRS communications—that beneficiaries of the same IRA had to distribute amounts proportional to their share of the IRA in order to satisfy a year-of-death RMD.
This was not specifically stated in prior RMD regulations, but was informally communicated by the IRS as a best practice. It is worth noting that some in the retirement industry questioned such shared beneficiary responsibility, based on the lack of an express IRS position in prior RMD regulations.
The 2024 final RMD regulations state that if there are multiple beneficiaries, it is acceptable for an IRA’s year-of-death RMD to be satisfied by one or more of the beneficiaries, at their discretion. In other words, it is not necessary for all IRA beneficiaries to share proportionally in satisfying a year-of-death RMD. This departure from previous informal IRS guidance may simplify future RMD compliance following an IRA owner’s death.
When Must Beneficiaries Satisfy Year-of-Death RMDs?
The final regulations lengthen the period within which beneficiaries must distribute a year-of-death RMD to avoid an excess accumulation penalty tax. Under previous final RMD regulations, the deadline faced by beneficiaries was the same as that required of the IRA owner: December 31 of the year of death. This could be problematic when an IRA owner dies late in the year or when a beneficiary is unaware of the IRA and its RMD requirements.
The 2024 final RMD regulations state that beneficiaries must distribute a year-of-death RMD by the later of the beneficiary’s year-of-death tax return deadline—generally April 15, including extensions—or December 31 of the year following the year of death. For most beneficiaries it will likely be the latter.
But, these final regulations do not address beneficiary liability for unsatisfied year-of-death RMDs. For example, if one of multiple beneficiaries takes a distribution that only partially satisfies that IRA’s year-of-death RMD, which beneficiary or beneficiaries are responsible for the excess accumulation penalty tax on the shortfall? The final regulations do not provide an answer.
What if There are Multiple Beneficiaries for Multiple IRAs?
It is here that unexpected complications arise, created by a new interpretation in the 2024 final RMD regulations. Specifically, it comes into play if a deceased IRA owner was aggregating his RMDs for distribution purposes (i.e., the IRA owner was calculating the total RMD amount for all his IRAs, then taking the total RMD amount from one or more—but not all—of the IRAs).
In this situation, the final RMD regulations state that it is the collective responsibility of all named beneficiaries of all of the decedent’s IRAs to distribute any aggregate RMD amount that had not been taken at the time of death. Any such shortfall is to be apportioned among all the IRAs, according to their relative balances (i.e., pro rata). This rule applies regardless of whether there is shared beneficiary ownership of all IRAs.
These regulations do not address, or take into account, the very real possibility that a beneficiary may be unaware of the existence of other IRAs, or of other beneficiaries. Furthermore, because IRA owners do not make an election stating whether they are using the RMD aggregation principle, there is no certain way for beneficiaries to make such a determination. In fact, such a decision may not even have been made by an IRA owner for that year before his death.
Does This Provision Violate Privacy Rights?
Fortunately, not every IRA beneficiary situation will present such ambiguity. But there are other issues too; issues besides the possibility of penalties due to unsatisfied year-of-death RMDs. It is not uncommon for retirement assets to be divided among multiple family members, or multiple beneficiaries. If this involves several IRAs, the decedent may not have intended to divide all assets equally. These regulations seem to imply that a sharing of IRA inheritance information will or must take place, which would be needed to ensure that year-of-death RMDs for multiple IRAs have been satisfied. Certainly, this could jeopardize the confidentiality of a bequest, as others in the industry have pointed out.
What is the Penalty, and for Whom?
If the IRS holds firm in its position that a decedent’s year-of-death year RMD is the collective obligation of all inherited IRA beneficiaries when a deceased IRA owner was using aggregation to satisfy RMDs for multiple IRAs, then it follows that multiple beneficiaries could—in theory—be liable for a share of such penalties. This, based on the shortfall attributed to each IRA by these regulations; even if one of the inherited IRAs would—on its own—have satisfied the RMD rules. Will the IRS attempt—and could it—enforce this?
What is the penalty tax? The SECURE 2.0 Act reduced the excess accumulation penalty tax for unsatisfied RMDs from 50 percent of the shortfall to 25 percent, with a further reduction to 10 percent if corrected within two years.
Can the penalty tax be waived? An excess accumulation penalty tax can be waived “if the account owner establishes that the shortfall … was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.” Such a waiver generally requires the individual to file IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. “and attach a letter of explanation.”
What is the Financial Organization’s Responsibility?
Financial organizations are generally not responsible for compliance actions that are required of IRA owners or beneficiaries, including taking RMDs. The final regulations generally take this position at several points. It would be virtually impossible for a single custodial organization to determine whether a decedent had satisfied year-of-death RMDs for all IRAs that she might own—or have information on other IRAs held elsewhere, or their beneficiaries.
Will Additional Guidance be Released?
The regulatory process typically requires the issuance of proposed regulations, followed by a period of public comment—written, in public hearings, or both—followed by the issuance of final regulations. The concept of shared beneficiary obligations for satisfying year-of-death RMDs for all IRAs was articulated in the July 2024 final RMD regulations, but was not contained in the 2022 proposed regulations. As a result, there was no opportunity for public comment on either its workability or appropriateness. This has left room for doubt as to whether it can be implemented or enforced.
As has been said of other issues associated with the SECURE Act of 2019 and SECURE 2.0, more guidance would be welcomed.