Once again, IRS waives RMDs for beneficiaries subject to the 10-year rule

Here we go again. For the fourth year in a row, the IRS has provided relief on required minimum distributions for beneficiaries of individual retirement accounts who are subject to the SECURE Act's 10-year payout rule.

[From 2023: IRS provides limited RMD relief]

On Tuesday, IRS issued Notice 2024-35, which excuses required minimum distributions missed in 2024 for IRA beneficiaries subject to annual RMDs within the 10-year period.

The original SECURE Act, which took effect in 2020, eliminated the stretch IRA for most IRA and Roth IRA beneficiaries and replaced it with a 10-year rule. The 10-year rule requires the entire inherited IRA balance to be withdrawn by the end of the 10^th year after death. The law did make an exception, though, for eligible designated beneficiaries, who still qualify for the stretch IRA and aren't subject to the 10-year rule.

However, IRS proposed regulations from February 2022 added a second requirement for beneficiaries who inherit IRAs from those who died after reaching their required beginning date, or RBD, for taking RMDs. (The RBD is generally April 1 of the year after the year the IRA owner turns 73.) The IRS said this group of beneficiaries also must take annual RMDs for years one through nine of the 10-year term. This provision has been very controversial and confusing. Recognizing this, the IRS for the fourth straight year has waived those RMDs by saying there will be no penalty for failing to taking them.

This new relief builds on previous IRS relief for 2021 and 2022 annual RMDs (in Notice 2022-53) and for 2023 RMDs (in Notice 2023-54). Notice 2024-35 adds another year of relief by excusing 2024 missed RMDs for non-eligible designated beneficiaries, or NEDBs, of IRA owners who died in 2020, 2021 or 2022 after their required beginning date. It also relieves missed 2024 RMDs for NEDBs of owners who died in 2023 after the required beginning date.

WHO DOESN’T GET RMD RELIEF

Notice 2024-35 does not affect lifetime RMDs. The RMD relief is only for IRA beneficiaries.

EDBs also don't qualify for this RMD relief.  Since they’re not subject to the 10-year rule, their 2024 RMDs must still be taken.

FIVE CLASSES OF ELIGIBLE DESIGNATED BENEFICIARIES

1. Surviving spouses.
2. Minor children of the account owner, until age 21 — but not grandchildren.
3. Disabled individuals — under the strict IRS rules.
4. Chronically ill individuals.
5. Individuals older than, or not more than 10 years younger than, the IRA owner.

The IRS reprieve also does not apply to RMDs for beneficiaries who inherited before 2020. Those beneficiaries are subject to the pre-SECURE Act rules, which allow any designated beneficiary to do the stretch.

The relief only applies to those beneficiaries who inherit after 2019 and who were originally subject to annual RMDs within the 10-year period. The new IRS relief, combined with the prior relief, means these beneficiaries will have no annual RMDs until at least 2025.

Finally, Notice 2024-35 doesn't apply to Roth IRA beneficiaries subject to the 10-year rule because inherited Roth IRAs aren't subject to RMDs for years one through nine of the 10-year term, regardless of the age of the deceased Roth IRA owner. That’s because Roth IRAs have no lifetime RMDs, so any Roth IRA owner is always deemed to have died before reaching his RBD.

RMD RELIEF MAY NOT BE GOOD LONG-TERM TAX PLANNING STRATEGY

While advisors should certainly alert clients to this IRS relief, it may pay for beneficiaries to avoid the break and take RMDs anyway.

Even though RMDs are not required for 2021 through 2024, advisors may still want to have clients in this group voluntarily withdraw from their IRAs while federal tax rates remain low. (Unless Congress acts, rates will go back up in 2026.) Putting off distributions also could mean these clients will face a larger tax bill at the end of the 10-year period.

IRS SAYS FINAL REGS COMING SOON

In Notice 2024-35, the IRS also says that it finally expects to finalize its proposed SECURE Act regulations, issued in February 2022, so they will be effective starting in 2025. This means that it's possible these final regulations will be issued later this year.

The IRS relief shows us once again just how complicated the IRA beneficiary RMD rules are. Advisors need to get the word out to affected beneficiaries and help them create a long-term plan for taking tax-efficient RMDs.

For more information on Ed Slott and Ed Slott’s 2-Day IRA Workshop, please visit www.IRAhelp.com.