In early 2022, the IRS issued proposed regulations concerning required minimum distributions (RMDs) to reflect changes introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The final regulations have been delayed to incorporate further modifications from the SECURE 2.0 Act of 2022. Meanwhile, the IRS has provided interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. This article aims to detail these changes, the implications for account holders and beneficiaries, and what to expect moving forward.
Understanding Required Minimum Distributions (RMDs)
RMDs are mandatory withdrawals that must be taken from individual retirement accounts (IRAs) and employer retirement plans once the account holder reaches a certain age. The failure to take RMDs results in significant penalties.
RMD Age Requirements
The age at which RMDs must begin has been adjusted:
- 70½ years if born before July 1, 1949
- 72 years if born between July 1, 1949, and 1950
- 73 years if born between 1951 and 1959
- 75 years if born in 1960 or later
Subject to plan provisions, employees still working for the employer maintaining the retirement plan can delay RMDs until April 1 of the year following retirement.
Special Rules for Roth Accounts
Lifetime RMDs are not required for Roth IRAs, and Roth account owners are treated as having died before their required beginning date (RBD). Previously, these rules did not apply to Roth employer plans, but starting in 2024, they do.
RMDs for Inherited Retirement Accounts
For retirement accounts inherited before 2020, RMDs could generally be spread over the beneficiary's life expectancy. The SECURE Act of 2019 changed this, requiring most beneficiaries to withdraw the entire account within 10 years of the original owner's death if the death occurred after 2019. Eligible designated beneficiaries can still take distributions based on their life expectancy, deferring the 10-year rule until after their death.
Who Are Eligible Designated Beneficiaries?
- Spouses
- Minor children of the IRA owner or employee
- Disabled or chronically ill individuals
- Individuals not more than 10 years younger than the IRA owner or employee
Proposed Regulations and Annual Distributions
The 2022 proposed regulations suggested that annual distributions are required during the first nine years of the 10-year period. This caused concern, as missed RMDs incur a hefty penalty tax. The IRS has provided interim relief for 2024, meaning that individuals who missed annual distributions in certain circumstances will not face penalties.
Circumstances for Relief in 2024
- The IRA owner or employee died in 2020-2023 on or after their RBD, and the designated beneficiary missed annual distributions.
- An eligible designated beneficiary died in 2020-2023, and the subsequent beneficiary missed annual distributions.
