RMD Rules When an IRA Owner Dies
By Jodie Norquist, CIP, CHSP
If you’re uncertain about the RMD rules, you’re not alone. The rules can be complicated. And you may find that many beneficiaries don’t understand the rules either. Here’s a refresher on RMD requirements after an IRA owner dies. It may be helpful when you are about to meet with a beneficiary.
Required Beginning Date
Traditional and SIMPLE IRA owners must begin taking required minimum distributions (RMDs) by April 1 following the year that they reach RMD age. This date is called the required beginning date (RBD). Roth IRAs do not require RMDs. Although IRA owners get three extra months in the following year to take their first RMD, they still have to take all subsequent RMDs by December 31 each year. So if an IRA owner waits until the following year to take his first RMD, he will need to take two RMDs that year.
When an IRA owner dies, you’ll need to know if the decedent was taking RMDs. Sounds easy enough, but that age has changed three times since 2019. Before 2020, the RMD age was 70½. Between 2020 and 2022, the RMD age was 72. The RMD age changed again to 73 in 2023 and will change to age 75 in 2033.
Here’s another way to look at it. For birth dates before July 1, 1949, RMDs were mandatory beginning in the year that the IRA owner reached age 70½. For birth dates on or after July 1, 1949, and on or before December 31, 1950, RMDs were mandatory beginning in the year that the IRA owner attained age 72. The SECURE Act of 2022 (SECURE 2.0) raised the RMD age to 73, for birth dates that occur on or after January 1, 1951, and on or before December 31, 1959. SECURE 2.0 also raised the RMD age to 75 beginning in 2033, for birth dates that occur on or after January 1, 1960.
NOTE: Due to a drafting error in the SECURE 2.0 Act, individuals born in 1959 have an RMD age of both 73 and 75. A technical correction by Congress will be needed.
Year of Death
If an IRA owner dies before satisfying his RMD for the year, the beneficiary must take the remaining RMD amount by December 31 in the year of death. If there are multiple beneficiaries, then each beneficiary must take their portion of the RMD: one beneficiary cannot satisfy the entire RMD amount or the shortfall of another beneficiary.
Example: Jane Wilson, age 75, died on July 23, 2023. She had not taken $9,000 of her $12,000 RMD from her Traditional IRA for 2023. Her two adult children (Max and Jennifer) each inherited 50 percent of her IRA. As a result, Max and Jennifer must each take a $4,500 distribution by December 31, 2023.
NOTE: The proposed RMD regulations automatically waive the excess accumulation penalty tax as long as the beneficiary satisfies the year-of-death RMD by their tax return due date, including extensions.
If the IRA owner had set up scheduled payments, your financial organization must stop these payments after you are notified that the IRA owner has died. The beneficiaries are considered owners of the assets at the point of death, and distributions after death must be paid to the beneficiaries.
Excess Accumulation Penalty Tax
If an IRA owner or beneficiary fails to timely distribute an RMD in the year of death, they are subject to an IRS excess accumulation penalty tax on the amount that should have been taken. SECURE 2.0 reduced this penalty tax from 50 percent to 25 percent. If the failure is corrected in a timely manner, the penalty tax is further reduced from 25 percent to 10 percent.
If an IRA owner did satisfy the year-of-death RMD before death, then most beneficiaries don’t need to take a required distribution until the following year, depending on the beneficiary distribution options available to them, which is based on many factors. However, at some point all beneficiaries will need to take mandatory distributions and making your beneficiaries aware of the RMD rules up front not only provides good customer service, but also helps them avoid a penalty tax.
To help your IRA owners and beneficiaries better understand RMD rules, refer them to IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
