Inherited RMD Update: IRS Waives 2024 Penalties and Delays to 2025

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In 2019, the SECURE Act changed how inherited required minimum distribution (RMD) rules work and added a new 10-Year Rule.

Since then, a significant number of heirs have not been clear on what kind of inherited RMD they are required to take. Specifically, the point of confusion comes down to non-eligible designated beneficiary heirs of individuals who died in 2020, 2021, 2022, and 2023 and on or after the decedent’s required beginning date.

Are they required to take an annual distribution each of the 10 years or do they just need to distribute the account by the 10th year?

The lawyers at the IRS released proposed regulations in keeping with the rules as written but very different than the rules everyone thought were intended.

Taxpayers waiting for final guidance have seen penalties waived for 2021 or 2022 RMDs, for 2023 RMDs, and now for 2024 RMDs.

The new notice is Notice 2024-35 (dated May 6, 2024 but released April 16). In this notice, the IRS yet again delays final regulations by one more year. This time that means that the new regulations will be in 2025 or later. The notice reads:

Final regulations regarding RMDs under § 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.

Careful readers will notice the language has softened from last year’s “will apply for” to this year’s “are anticipated to apply for,” potentially showing the IRS author’s loss of faith that final regulations will be drafted for 2025 either.

In addition to delaying any final guidance, the IRS waived any penalties for 2024 inherited RMDs related to the 10-Year required distribution rule.

B. Guidance for certain taxpayers who did not take a specified RMD. To the extent a taxpayer did not take a specified RMD (as defined in section IV.C of this notice), the IRS will not assert that an excise tax is due under § 4974.

C. Definition of specified RMD. For purposes of this notice, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to § 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of § 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

• a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee (or IRA owner) died in 2020, 2021, 2022, or 2023, and on or after the employee’s (or IRA owner’s) required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii); or

• a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to § 401(b)(5) of the SECURE Act) if: (1) the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and (2) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii) of the Code.

While we are glad that there will be no penalties for failing to take a RMD in 2024, we continue to wonder what will be decided, when it will be decided, and what we should do for 2025 and onward.

While we won’t know with any certainty until the IRS publishes their final guidance, it is likely that Inherited IRA owners will be required to take distributions if they inherited their accounts from an original owner who had already started RMDs and died in or after the year 2020.

For now, those who were prepared to begin distributions in 2024 can stand down. We recommend waiting for the final guidance but being prepared to begin distributions in 2025.

We will continue to monitor the IRS guidance on this matter. If you’d like to stay updated on our latest understanding of this issue, you may enjoy subscribing to our newsletter.

It is important to note that we are not tax professionals. As always, if you have any tax questions, the best advice is to consult with your tax professional.

Photo by Successfully Canadian on Unsplash. Image has been cropped.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.