The Savings Game: Who Has to Report RMDs This Year?

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By Elliot Raphaelson From Tribune Content Agency

The IRS has issued additional guidelines regarding the reporting of Required Minimum Distributions (RMDs) for beneficiaries under the SECURE Act of 2019.

One of the most important provisions of that law raised the minimum age for RMDs from 70 1/2 years of age to 72 years of age. As with so many regulation changes, this created ambiguities.

In October, the IRS issued Notice 2022-53, which clarified who is required to report RMDs in 2022 and who has been granted a reprieve from penalties when RMDs were not taken in 2020 or 2021 because the IRS had not issued timely guidance.

Another significant change under the SECURE Act was that many designated beneficiaries could no longer use the so-called “stretch option.” Designated beneficiaries who inherited an IRA prior to 2020 were able to stretch their distribution schedule over their lifetime.

If you inherited an IRA before 2020, and have been using the IRS tables to compute your RMD, your situation is unchanged. However, everyone subject to RMDs must use the tables specified in IRS publication 590-B. If you are a designated beneficiary who inherited an IRA in 2020 or thereafter and you don’t qualify to be an eligible designated beneficiary, you will be required to use the 10-year rule.

Types of Beneficiaries

What is a designated beneficiary? This is the person or persons whom the owner of the IRA identified on the IRA beneficiary form or the employer’s beneficiary form. Being named as an heir in a will only is not sufficient.

A designated beneficiary, as stated above, may use the stretch option for taking RMDs if he or she is deemed an eligible designated beneficiary (EDB).

There are five classes of EDBs. They are: surviving spouses; minor children (not grandchildren) of the owner until age 21; disabled individuals; those who are chronically ill; and individuals older than, or not more than 10 years younger than the IRA owner.

These individuals must be named on the IRA or employer’s plan beneficiary form. EDBs who inherited after 2019 may still use the stretch option, and take RMDs based on their expected individual life as indicated in IRS tables.

If you inherited an IRA through an estate because you were not named on a beneficiary form, you are considered a non-designated beneficiary. The SECURE Act did not change the regulations associated with these beneficiaries. IRS Notice 2022-53 did not grant any waivers of penalties for non-designated beneficiaries. (I will discuss RMD regulations for non-designated beneficiaries in a subsequent column.)

Timetable for Distributions

The required beginning date (RBD) for RMDs is generally April 1 the year after an owner reaches age 72. This date is significant because designated beneficiaries who inherited an IRA from an individual who reached his RBD who are not EDBs are required to take RMDs for years 1 through 9 after the death of the IRA owner. By the end of the 10th year after the death of the owner, any remaining funds in the IRA must be withdrawn.

If the owner had not reached RBD, then you don’t have to take RMDs; however, at the end of the 10th year after the owner’s death, any remaining funds must be withdrawn. Nonetheless, in order to avoid a large tax liability in one year, you should consider yearly withdrawals. Roth IRA beneficiaries are not required to take RMDs, but the 10-year rule does apply.

Penalty Waiver for Designated Beneficiaries

If you are not an EDB, and inherited an IRA in 2020 from an owner who died after he/she reached her RBD, then you were required, under the IRS final regulations, to start taking RMDs in 2021. If you inherited an IRA in 2021, you were required to take RMDs starting in 2022.

Normally, the penalty for under-withdrawn RMDs is 50 percent. So, if you are required to make an RMD of $2,000, and you only withdraw $1,000 in that year, your penalty to the IRS would be $500.

However, because the IRS had not issued final regulations if you were subject to RMDs in 2021 and 2022, the IRS has waived any penalty. However, starting in 2023, you must start making RMDs, for each year up to the 10th year after the owner’s death. By the end of the 10th year, all the funds in the IRA must be withdrawn.

(Elliot Raphaelson welcomes your questions and comments at [email protected].)

©2022 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.

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