Overview
For anyone that works with retirement plans, including individual retirement accounts (IRAs), few events are more highly anticipated than the release of regulations from the Treasury Department via the Internal Revenue Service (IRS). It is likely you recall that the Setting Every Community Up for Retirement Enhancement Act (i.e., SECURE Act), generally effective in 2020, had a significant impact on the required minimum distribution (RMD) rules for IRA owners and IRA beneficiaries. In response to the SECURE Act, the IRS released RMD proposed regulations on February 24, 2022, which provided needed clarification on several SECURE Act provisions. After taking into consideration comments that were submitted during the mandatory comment period, the IRS issued RMD final regulations Friday, July 19, 2024.
Annual distribution requirement
Perhaps the most anticipated area of interest while awaiting the release of the final regulations was whether the IRS would retain from the proposed regulations the requirement for a ‘designated beneficiary’ to take annual distributions under the 10-year rule when a traditional IRA owner dies on or after his/her required beginning date (RBD). This question was specifically addressed by the IRS, and they concluded that there was no Congressional intent to allow a beneficiary subject to the 10-year rule to stop taking RMDs once they had commenced for the IRA owner. On a side note, recall the IRS provided relief from an excess accumulation penalty for any beneficiary in this scenario (i.e., IRA owner died in 2020 or later and on/after his/her RBD) that failed to take an annual RMD in 2021, 2022, and/or 2023, and/or fails to in 2024. The IRS makes a point of stating in the RMD final regulations that these annual distributions must be taken beginning in 2025 with the 10-year period commencing the year of the IRA owner’s death, essentially meaning the 10 year-period will end as early as December 31, 2030, for some beneficiaries.
Spouse treating as own
Another point of interest in the final regulations relates to the deadline for a spouse beneficiary to treat a decedent’s IRA as his/her own IRA. The 2022 proposed regulations indicated this deadline was the later of the end of the year following the year of the IRA owner’s death or the end of the year that the spouse beneficiary would have been required to begin taking distributions as an IRA owner. This deadline was removed in the final regulations, however, included in the final regulations is a provision which states that in a case where an IRA owner died before his/her RBD and a spouse beneficiary elects the 10-year rule and prior to year 10 treats the IRA as his/her own IRA and is in or past his/her own RMD start year, such spouse must take what are referred to as “missed RMDs” or “hypothetical RMDs”. In such cases, under the final regulations, a spouse must take all missed RMDs before he/she can treat the remainder of the IRA as his/her own.
Multiple beneficiaries and satisfying the year of death RMD
Another issue the IRS addressed in the final regulations that was previously not addressed relates to when a traditional IRA owner dies before taking his/her RMD for the year and more than one beneficiary inherits the IRA. Prior to the final regulations clarifying how the year of death RMD should be satisfied it wasn’t uncommon for the beneficiaries to pro-ratably share the RMD amount.
Example: Jill, age 79, owned a traditional IRA and died in 2025 prior to taking the $3,000 RMD from her IRA. Jill’s three adult children are designated as beneficiaries of the IRA on an equal basis. In the past it was the common interpretation that each beneficiary should at minimum take $1,000 in 2025 to satisfy the RMD requirement. The final regulations clarify that one beneficiary could take $3,000 to satisfy the entire year-of-death RMD and the other two designated beneficiaries would not have to distribute anything for the year-of-death.
IRS Form 5305 series documents
One area that is seemingly un-related to the issuance of the final regulations but will most definitely be affected is the timing of when the IRS will update its model documents (i.e., IRS Form 5305 series documents). Language in these documents pertaining to RMDs for IRA owners and beneficiaries will be updated to reflect changes made by the SECURE Act, SECURE 2.0 Act, and the final Treasury Regulations. The question is when will the documents be made available on its website and then of course what the deadline for amending IRA agreements will be.
Summary
Though the RMD final regulations did not make significant changes to the proposed regulations, they did solidify several provisions that have been topics of discussion for several years. Things to keep in mind include: 1) Once RMDs begin for an IRA owner they must continue for a beneficiary upon the IRA owner’s death; 2) Generally, there is not a deadline for a spouse beneficiary to treat a decedent’s IRA as his/her own IRA, but in cases where an IRA owner dies before his/her RBD and a spouse beneficiary delays the election to treat as own, ‘hypothetical RMDs’ may apply; 3) In a case where an IRA owner passes away without having fully satisfied his/her RMD for the year and there are multiple beneficiaries one of them can satisfy the RMD; and 4) The IRS will eventually release updated model documents and mandate an amendment of IRA agreements.
Wolters Kluwer will continue to watch for the IRS’s release of updated model documents.
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