Top IRA Questions from Ascend
By Kristiana Rodriguez
Every year industry professionals gather with Ascensus trainers at the Ascend conference. Not only do they get to continue their education and refine their expertise in retirement, health, and education savings plans, but they get to submit questions to our highly-qualified trainers.
September’s Ascend conference was held in sunny, hot San Diego, Calif., and we had more questions submitted than ever before. Here are the top questions asked and answered over the week. This representative sampling reflects the fact that required minimum distribution (RMD) issues—for beneficiaries, in particular—were high in attendees’ minds.
Beneficiary Questions
Can you clarify the distribution options for a minor eligible designated beneficiary (EDB) who reaches the age of majority?
If the IRA owner’s minor child beneficiary chooses life expectancy payments as her distribution option, those payments will begin in the year following the year of the IRA owner’s death. When the minor reaches the age of majority (age 21 under the final RMD regulations), she essentially loses EDB status and must distribute the remaining IRA assets following the 10-year rule. Annual life expectancy payments will continue in years 1 through 9, with a total distribution by year 10 (the year she turns 31). This applies even if the IRA owner died before the required beginning date (RBD) or had a Roth IRA.
How do you confirm if a beneficiary is an EDB? Should our financial organization request proof of chronic illness or disability?
While financial organizations are not required to determine EDB status, or—in this example—to request documentation verifying that an IRA beneficiary is disabled or chronically ill, the requirements for qualified retirement plans differ, and plan administrators are responsible for meeting RMD rules, and thus for determining EDB status. In this case plan administrators must collect proof. Disability and chronic illness are determined “as of the date of death.”
IRS regulations do not place such responsibilities on IRA custodians, trustees, or issuers. For IRA clients, your financial organization should decide on the extent to which you will assist beneficiaries in meeting their payout obligations, and the best business practices to meet such objectives. Whatever your financial organization decides to do, you should document your process so everyone can follow the same steps when processing death claims and establishing inherited IRAs.
Is a beneficiary supposed to take life expectancy payments in addition to depleting the account in 10 years?
For a non-Roth IRA, including Traditional, SEP, or SIMPLE, it depends on when the IRA owner died. If the beneficiary is subject to the 10-year rule, but the IRA owner died before the RBD, no annual payments are required. This is always the case with a Roth IRA, since there is no RBD.
If the beneficiary is subject to the 10-year rule and the IRA owner died on or after the RBD, annual life expectancy payments are required in addition to depleting the account within ten years.
What if a beneficiary failed to take a life expectancy payment under the10-year rule before the final RMD regulations were released?
To address missed life expectancy payments that were due in 2021 – 2024, the IRS issued Notice 2022-53, Notice 2023-54, and Notice 2024-35, which state that the IRS will not enforce the excess accumulation penalty tax for a designated beneficiary if
the account owner died on or after the RBD in 2020, 2021, 2022, or 2023, and
the designated beneficiary is not taking life expectancy payments.
This relief does not extend the 10-year period. The 10-year period begins the year the IRA owner died. Going forward, the beneficiary should know that annual payments for the first 9 years are required when using the 10-year option upon inheriting an IRA from someone who died on or after the RBD. The inherited IRA’s December 31, 2024, fair market value will determine the life expectancy payment due for 2025.
Who is penalized for not removing a year-of-death RMD when there are multiple beneficiaries?
While the final RMD regulations do describe shared responsibility among multiple beneficiaries for satisfying death-year RMDs, there is currently no guidance as to who bears any penalty consequences if this responsibility is not met. Neither the final RMD regulations or the new 2024 proposed regulations address this issue.
Penalty Tax Exceptions, Repayments, and Contribution Limits
Do repayments of certain penalty-free distributions affect an IRA owner’s annual contribution limit?
No, repayments of the following penalty-free distributions will not affect an IRA owner’s annual contribution limit.
Qualified reservist distributions
Qualified birth or adoption distributions
Qualified disaster distributions
Terminally ill individual distributions
Domestic abuse victim distributions
Emergency personal expense distributions
Financial organizations must report these repayments on Form 5498, in Box 14a, Repayments, with the corresponding code in Box 14b, Code. For a list of repayment codes, see the 2024 Instructions for Forms 1099-R and 5498.
If a Traditional IRA owner is under age 59½, the financial organization must report the withdrawal as an early distribution (code 1, early distribution, no known exception). If an IRA owner is taking a nonqualified Roth IRA distribution, the financial organization must use code T, Roth IRA distribution, exception applies. IRA owners will file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to show that they qualify for a penalty tax exception.
Required Minimum Distributions
Under what circumstances does the end-of-year account balance need to be adjusted for calculating required minimum distributions (RMDs)?
The December 31 fair market value is an important factor in calculating an RMD. The account balance should be adjusted when one of the following has occurred.
A distribution is taken within the last 60 days of the year and rolled over after January 1 of the following year.
A transfer is not received in the same calendar year that it was initiated and sent from the transferor IRA.
A surviving spouse who has reached the applicable RMD age transfers or rolls over an inherited IRA in a year after the deceased IRA owner’s death.
The account balance should not be adjusted when
the first RMD is taken by the RBD, or
a late RMD is taken for a prior year.
If you want answers to your IRA questions, it’s not too late to register for Ascend 2024 planned November 4-6, 2024. Ascend 2025 will be in Nashville, Tennessee, November 17-19, 2025.
