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.
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.
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 By the end of the 10th year after the death of the owner, any remaining funds in the IRA must be withdrawn.Penalty Waiver for Designated Beneficiaries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].)
