The IRS issued its highly anticipated final regulations for required minimum distributions on July 19, 2024. These regulations incorporate rules from both the Secure and Secure 2.0 acts. With these final regulations, the IRS answers many burning questions, including whether designated beneficiaries must take RMDs on an annual basis.
Proposed regulations were also issued for the Secure 2.0 Act.
Essential Reminders for Understanding the Finalized RMD Regulations
Roth accounts: Owners of Roth accounts are not subject to RMDs. That has always been the case for Roth IRAs. For designated Roth accounts, or DRAs, which are Roth 401(k), Roth 403(b), and Roth 457(b) accounts, that rule became effective for years after 2023.
As a result, the rules that apply to beneficiaries of Roth IRAs and DRAs for 2024 and after are the same as those that apply to beneficiaries who inherit traditional accounts from someone who died before they were supposed to start taking RMDs. These rules will be covered in an upcoming column.
IRAs vs. Employer Plans: The explanations covered in this article apply to both IRAs and employer plans. If there is an exception where a rule applies to only one of the two, that exception will be stated.
Employer plans: These are qualified plans, such as 401(k) and profit-sharing plans, 403(b) annuity contracts, 403(b) custodial accounts, 403(b) retirement income accounts, and eligible governmental 457(b) plans.
IRA owners and employer-plan participants: For this article, both are collectively called “participants.”
Key Definitions
Certain definitions must be known when discussing the RMD rules, particularly for beneficiaries. Since I will use these definitions to share my findings from the final RMD regulations, I will include some key ones here.
Applicable Age: The year for which your first RMD is due from your own (not inherited) retirement accounts.
Required minimum distribution (RMD): The minimum amount to be withdrawn from an IRA or employer plan (retirement account) for a year. The RMD rules for participants differ from those that apply to beneficiaries.
Designated beneficiary: Any individual designated as a beneficiary by the participant. The use of “individual” is intentional here and excludes nonperson beneficiaries such as estates, charities, and corporations.
Exceptions for see-through trusts: Certain trust beneficiaries are treated as designated beneficiaries if the trust is a “see-through trust.” Consult with your estate planning attorney regarding the pros and cons of designating a trust as your beneficiary and whether the trust is or should be a see-through trust.
Eligible designated beneficiary: A designated beneficiary who, as of the date of the participant’s death, is:
- The surviving spouse of the participant.
- A child of the participant who has not reached the age of 21.
- Disabled.
- A chronically ill individual.
- Not more than 10 years younger than the participant.
Special rules apply for determining if a beneficiary is disabled or chronically ill. Your estate planning attorney can help to determine whether you meet the requirements.
Required beginning date (RBD): April 1 of the year following the year you reach your applicable age. This April 1 date is the deadline by which your RMD for your applicable age—your first RMD from your own retirement account—must be taken.
Uniform Lifetime Table: The life expectancy used to calculate RMDs for participants. This table assumes the participant’s beneficiary is 10 years younger than the participant, regardless of the beneficiary’s age.
Joint and Last Survivor Table: This table is used to calculate RMDs for a participant whose spouse is their sole primary beneficiary and who is more than 10 years younger than the participant.
Single Life Expectancy Table: This table determines the life expectancy that a beneficiary must use to calculate annual RMDs for their inherited accounts.
Successor beneficiary: A beneficiary who inherits a retirement account from the primary (original) beneficiary.
These are some of the definitions that form the foundation for applying the RMD regulations.
The Quirk About RMD Distributions For Individuals Born in 1959
You must take RMDs from your IRA or employer plan account (retirement account) beginning the year you reach your applicable age and continue every year for the rest of your life.
The applicable age was increased from age 70½ to age 72 for account owners who reached age 70½ after 2019. This was a Secure Act change.
The Secure 2.0 Act increased the applicable RMD age from 72 to 73 and 75 for those born after 1950. However, a technical error caused those born in 1959 to have applicable ages of 73 and 75.
The final RMD regulations partially corrected that error by excluding 1959 from applicable ages 73 and 75, leaving the status as “reserved.” The applicable ages, as provided in the final RMD regulations, are as follows:
- For participants born before July 1, 1949, the applicable age is 70½.
- For participants born on or after July 1, 1949, but before Jan. 1, 1951, the applicable age is 72.
- For participants born on or after Jan. 1, 1951, but before Jan. 1, 1959, the applicable age is 73.
- For participants born on or after Jan. 1, 1960, the applicable age is 75.
The final RMD regulations do not include an applicable age for those born in 1959.
However, under the proposed regulations for Secure 2.0, the applicable age for a participant born in 1959 would be 73.
Your RMD must be taken by Dec. 31 of the year it is due. However, an exception applies to your RMD for the year you reach your applicable age. Under that exception, your RMD can be taken as late as April 1 of the following year—your required beginning date, or RBD.
Please note: A plan can allow qualifying participants to defer their applicable age past the ages above until retirement. For some employer plans, RMDs can also start earlier than the ages above. Check with your employer to confirm your applicable age.
The Annual RMD Requirement for Post-RBD 10-Year Beneficiaries Is a Lock
Whether the annual RMD requirement for certain 10-year beneficiaries would stay is one of the most anticipated explanations for the final RMD regulations.
Ten-year beneficiaries must fully distribute their inherited accounts no later than the 10th year after inheriting.
A 10-year beneficiary who is subject to annual RMDs is one who inherited a retirement account after 2019 and is either of the following:
- A designated beneficiary who inherited a retirement account from a participant who died on or after their RBD.
- A successor beneficiary of an eligible designated beneficiary who was taking life expectancy distributions.
These regulations confirm that the annual RMD requirement applies to these beneficiaries. Further, the 10-year deadline is not extended. Therefore, a 10-year beneficiary who inherited a retirement account in 2020, for instance, must ensure that the account is fully distributed no later than 2030, whether or not they took RMDs for the waived years. For additional explanations of this rule, see IRS Extends Waiver of Excise Tax for Inherited IRAs, but Not RMDs.
The Reason for the Annual RMD Requirement
If a participant dies on or after their RBD, their beneficiary is subject to the “at least as rapidly,” or ALAR, rule. Under the ALAR rule, beneficiaries must continue taking annual RMDs. These annual RMDs for beneficiaries would be calculated using the Single Life Expectancy Table, not the Uniform Lifetime or Joint Life Expectancy tables the participant would have used. However, the language in the Secure Act led many to believe that beneficiaries subject to the 10-year rule would not be subject to the ALAR rule.
The proposed RMD regulations clarified that all beneficiaries, including 10-year beneficiaries, are subject to the ALAR rule. Therefore, if the account owner dies on or after their RBD, their designated beneficiary must take annual RMDs over their single life expectancy beginning the year following the participant’s death and continuing for every year after up to the 10th year when the account must be fully distributed.
In response to backlash about the confusing language in the Secure Act, the IRS waived the excise tax that would have otherwise applied to any of these 10-year beneficiaries who did not take RMD for 2021, 2022, 2023, and 2024
If you are a 10-year beneficiary, you must take your 2025 RMD in 2025. If you want to take any RMDs you did not take before 2025, you may do so, but that is optional. When deciding, consider that the 10 years are not extended and consult your tax advisor regarding how to proceed for tax-efficiency purposes.
Older Beneficiaries Are No Longer Penalized
Under the ALAR rule, eligible designated beneficiaries must take annual RMDs over the longer of the beneficiary’s single life expectancy or the remaining single life expectancy of the decedent. However, the proposed regulations penalized beneficiaries older than the decedent by requiring such a beneficiary to fully distribute the account when the beneficiary’s life expectancy ends. The final regulations removed this requirement, which means that a beneficiary who is older than the participant may take distributions over the full life expectancy of the participant.
For example, John died in 2020 at age 75, after his RBD. Therefore, the ALAR rule applies to his beneficiary.
John’s beneficiary is his 80-year-old sister, Kim. Kim is an eligible designated beneficiary because she is “not more than 10 years younger” than John. Therefore, she must take distribution over her single life expectancy or John’s single life expectancy, whichever is longer. In this case, John’s life expectancy is longer.
The following is a comparison of John’s and Kim’s life expectancies.
In this example, the proposed regulations required Kim to fully distribute the account no later than 2031, when she would be 91, and her life expectancy would be less than one. But, under the final RMD regulations, Kim can now extend her inherited account to 2034 when John’s life expectancy ends. For how life expectancy is determined, see Avoid RMD Shortfalls With These 5 Top Rules on Life Expectancy.
More to Come
The final regulations are 260 pages long and cover other pertinent information about the RMD rules for account owners and beneficiaries. This article only scratches the surface. As with most regulations, the IRS is anticipated to provide further clarifications when necessary. I will provide additional explanations over the coming weeks. In the meantime, please consult with your advisor regarding your RMD obligations and options for your own retirement accounts and any that you inherit.