Missed 2021 RMD Question
I am trying to get a better grasp of the strategies that are available to reduce or eliminate missed RMD penalties apart from the request for a waiver and apart from the IRS Notices waiving the penalty for certain missed RMDs for 2021 – 2024. The following hypothetical occurred to me, but I’m not sure of the answer. Any help that can be provided is greatly appreciated.
Plan owner died in 2020 at age 65 leaving his IRA 100% to his older brother (age 68 in 2020). Older brother took no RMDs in 2021, 2022, 2023, and 2024, but will be getting on track in 2025 and later years. My review of the rules suggests that one option older brother could consider is electing to take under the 10-year rule by 12/31/2029. This appears to eliminate any penalty that would otherwise be due on the 2022, 2023 and 2024 missed RMDs. But will a timely 10-year rule election also eliminate any penalty due on the 2021 missed RMD? It seems that a different rule – requiring older brother to liquidate the account by 12/31/2025 – is the only one available to older brother to avoid the penalty on the 2021 missed RMD. Is that correct?
Thanks in advance for your help.
Permalink Submitted by Alan - IRA critic on Tue, 2025-02-04 16:57
The IRS has been granting penalty waivers with a properly filed 5329 for each late RMD year.
The option for electing the 10 year rule to apply instead of EDB treatment was 12/31/2021, when EDB RMDs would have had to begin. Missing that deadline means that the beneficiary is still an EDB, but with missed RMDs. Therefore, the 2021-2024 RMDs are late and need to be calculated and distributed. A Form 5329 should then be filed for each year requesting that the penalty be waived for reasonable cause. Fortunately, the IRS has been granting these waivers so far, but now that the penalty has been reduced, these waivers could stop anytime.
Life expectancy RMDs can then continue starting in 2025, and the inherited IRA will then last much longer than 10 years.
Permalink Submitted by Salvatore LaMendola on Tue, 2025-02-04 18:38
Thank you, Alan, for your prompt reply. Treas. Reg. § 54.4974-1(g)(2) in its proposed and final form seems to me to be an escape hatch for the 2022, 2023 and 2024 RMDs without having to go through the Form 5329 waiver process. That regulation is titled “Automatic Waiver After Election to Distribute Within 10 Years of Employee’s Death”. The key part for the question is § 54.4974-1(g)(2)(iv) which states the last requirement for the automatic waiver, which is that “The payee elects the 10-year rule described in §1.401(a)(9)-3(c)(3) by the end of the ninth calendar year following the calendar year of the employee’s death.”[emphasis mine]. This is how I came up with 12/31/2029 in my question. If you agree that this is an alternative way to handle the 2022, 2023 and 2024 RMDs, do you think this same regulation can be used to handle the 2021 RMD too despite the fact that it did not appear in proposed form until early the follwing year (i.e., 2022)? Or is that too much of a stretch (no pun intended)?
As a side note, I went through the instructions for the 5329 for all years concerned and not once was the automatic waiver granted by the regulation described above ever mentioned. Shameful, in my opinion.
Permalink Submitted by Alan - IRA critic on Tue, 2025-02-04 21:46
Good point. I was not aware of this particular multi year penalty exception which overrides the requirements stated earlier in the final Regs.
It extends the deadline to opt out of EDB treatment for 8 additional years to the end of year 9, but still will require an affirmative election notice to the IRA custodian. However, the applicability date for this provision is 1/1/2025 which makes no sense to me since the Secure Act limbo period was 2021-2024 when an EDB would not have been aware of the option to opt out of EDB treatment, therefore the penalty relief should apply back to 2021, not after 2024. Perhaps that applicability date simply reflects the overall date for the Secure Act Regs. The final Regs generally indicate that taxpayers can make a good faith interpretation of the final Regs OR the current Regs for years prior to 2025.
Given the mass confusion of this 5 year rollout, I doubt that there is any risk in not filing those 5329 forms. While it may not make tax sense to defer all RMDs until year 10, the chance of the IRS levying any missed RMD penalty for any of these years is unlikely as long as a total distribution takes place in year 10.
I’m not sure if you expected the penalty to be waived in 2022-2024, but why not 2021 as well?