IRA Beneficiaries Get More Time to Make Traditional IRA RMDs

Federal employees and retirees who are traditional IRA beneficiaries and subject to the 10-year payout period are in luck. Per the SECURE Act, they would have been required to take a 2024 required minimum distribution (RMD). But the IRS in Notice 2024-35 (issued April 16,2024) stated that the IRS is excusing 2024 RMDs.

Any non-spouse beneficiary (with some exceptions) of a traditional IRA whose owner died after December 31, 2019, and who must withdraw the entire inherited traditional IRA within 10 years of the death of the traditional IRA owner, does not have to withdraw any inherited IRA funds during 2024.

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Background Information on Traditional IRA RMDs

The SECURE Act, passed into law in December 2019, provided that most non-spouse beneficiaries of traditional IRA owners who died after December 31, 2019 could no longer stretch RMDs over their lifetime. Instead, these “non-eligible designated beneficiaries” become subject to a 10-year payment rule.

Many traditional IRA beneficiaries interpreted this to mean that they could hold off withdrawing any money from their inherited traditional IRAs until the end of year 10 following the death of the traditional IRA owner. In so doing, they could time their withdrawals to lower their taxes while their inherited IRA balance continues to grow.

However, in February 2022 the IRS proposed rules mandating annual withdrawals for these beneficiaries during years 1 through 9 of the required 10-year payout period. Specifically, the IRS said that annual required minimum distributions (RMDs) are required during years 1 through 9 if the original IRA owner had died on or after his or her RMDs were required to begin. That required beginning date (RBD) is generally April 1 of the year the IRA owner becomes age 73.

The IRS position led to widespread criticism and confusion. After complaints from individuals and financial-service organizations, the IRS said it would not impose penalties for missing RMDs until the details could be finalized. This allowed inherited IRA owners to skip taking money out in any of the years 1 through 9. This was the case for the year 2022, the year 2023, and now for the year 2024. The penalty for failing to take required IRA payouts is 25 percent of the amount that should have been taken out.

When to Take Inherited Traditional IRA Distributions

According to IRS Notices during 2022, 2023 and now during 2024, any non-spouse beneficiary of a traditional IRA who inherited the IRA after December 31, 2019, and therefore subject to the 10-year payout rule, is not required to receive annual RMDs until 2025. Even so, it may be a good idea for these inherited IRA owners to voluntarily take IRA withdrawals while individual tax rates continue to be low (at least until at least December 31, 2025 at which time the low individual tax rates passed as part of the Tax Cuts and Jobs Act of 2017 are due to expire unless renewed by Congress).

What non-eligible designated beneficiaries of traditional IRAs have to remember is that they still have 10-years to deplete (withdraw) the entire inherited IRA. For example, a 52- year who inherited a parent’s traditional IRA when the parent died in 2021 has until December 31, 2031 to deplete the account.

It becomes a tactical tax question. In some cases, it may pay to wait to take distributions, while in other cases it may be more tax-efficient to time the distributions over 10 years.

Successor Traditional IRA Beneficiaries

Things get even more complicated for “successor” beneficiaries. “Successor” beneficiaries are those individuals who inherited an inherited traditional IRA whose original owner earlier and the original beneficiary died.

The following example illustrates:

Cynthis is a 75-year-old grandmother who inherited a traditional IRA from an older brother who died in 2018. Starting in 2019, Cynthia took mandatory distributions from the inherited IRA starting in the year 2019. The mandatory distributions were based on Cynthia’s life expectancy. Cynthia named her 25-year-old granddaughter as the successor beneficiary of her inherited traditional IRA. Cynthia died in 2021. Cynthia’s granddaughter is required to continue taking annual distributions and deplete the inherited IRA using her grandmother’s life expectancy and deplete the inherited IRA by that end of 2031. The granddaughter got a reprieve for mandatory annual distributions for the years (2025-2031) to empty the inherited IRA account.

Who Still Has to Take a 2024 RMD?

IRS Notice 2024-35 does not change the rules for “lifetime RMDs”. Lifetime RMDs are RMDs from inherited IRAs from “eligible designated beneficiaries.” These are RMDs by beneficiaries who inherited traditional IRAs before January 1, 2020. Also included among “eligible designated beneficiaries” are spouses and certain other beneficiaries such as the chronically ill who inherited traditional IRAs after December 31, 2019.

IRS Notice 2024-35 also suggests that after two years, the IRS may finally be ready to finalize its February 2022 proposed regulations sometime later in 2024.