Annual RMDs For Certain Beneficiaries Kick in Soon
By Ian Berger, JD
IRA Analyst
The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.
Here’s some background:
In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)
The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).
Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.
So, how is the 2025 RMD calculated? Here’s an example:
In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.
Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.