Proposed RMD Rules: The Madness Continues

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Andy Ives, a columnist for Ed Slott, recently published an article titled “IRA Beneficiary Payout Rules – the Madness Continues .”

In the piece, Ives describes a very normal inheritance case of “a relatively young father (49) passed away in late 2022 and left his traditional IRA to his then-19-year-old daughter.”

He then proceeds to describe how IRS Notice 2023-54 would apply if those proposed guidelines become the final rules.

Note that they haven’t become finalized law yet. You can read more in “Inherited RMD Update: IRS Waives 2023 Penalties and Delays to 2024.”

Regardless, Ives explains what the proposed regulation could be like for this bereaved minor daughter:

When a person dies before their required beginning date (which Dad did here), an eligible designated beneficiary (EDB) has a choice – stretch or the 10-year rule. In this case, Daughter qualifies as an EDB minor. However, since she was already 19 in the year of death, her stretch (if she chooses) is only good for 2023 and 2024 when she is 20 and 21. Then her 10-year rule begins in 2025 and will last until 2034. Since RMDs were turned on by her with the 2 years of stretch, she will also have RMDs in years 1 – 9 of the 10-year rule. These RMDs will follow the same single life expectancy factor she was already using when she was 20 and 21. (There is no waiver of her 2023 stretch RMD. Notice 2023-54 is not applicable in this situation.)

If, however, she chooses the 10-year rule to start immediately, her 10-year window will start in 2023 and run until 2032. She will not have any RMDs for the entire 10-year period because Dad died prior to his required beginning date, and Daughter never turned RMDs on with a stretch.

So, these are her choices:

  • 12-year payout window with annual RMDs and a closing year of 2034, OR
  • 10-year payout window with no RMDs and a closing year of 2032.

In this real-life scenario, items under consideration included the definition of an EDB, the ages of the deceased and the beneficiary, the ability for an EDB to choose a payout structure, the “springing” nature of the 10-year rule when an EDB minor turns 21, the “at least as rapidly” rule, and the application of IRS Notice 2023-54.

And the now-20-year-old beneficiary who lost her father less than a year ago is supposed to navigate this mess on her own? No chance. This is madness.

Remember, the IRS expects the surviving child, spouse, or other loved ones to be able to navigate these rules.

Years ago, David Marotta and I wrote a piece entitled “One Hidden Way the IRS Hurts the Bereaved.” At the time, we were talking about how the then inherited RMD rules required heirs to face their loved one’s loss again every year, noting how many years it has been, how likely he or she is to die and how much of the inheritance remains in the account.

Now, those same rules apply, but inherited IRA owners are required to navigate complexity upon complexity just to discover what cruel rule they must follow.

It is still counterproductive for everyone involved.

What we wrote before still rings true:

By deferring the taxation of these accounts, the traditional IRA essentially forced the government to save and invest. By the time the owner is ready to distribute, the value of the IRA is significantly larger. Thus every year the government allows its citizens to delay taxation of their retirement assets, the government’s portion of the account grows at market rates of return.

This deferred taxation is one of the only forms of saving and investing in which the government has ever participated.

Obliging IRA participants to harvest taxation earlier for the government via RMDs actually hurts the government’s revenue.

IRA distribution regulations are extremely shortsighted. In addition to forcing IRA owners to dwell on their deaths and the loss of their loved ones to complete the calculation, the RMD itself robs both the taxpayer and ultimately the government of wealth in the long run. All this, so the government can have money now.

I’m with Andy Ives. This is madness.

Photo by Tom Dils on Unsplash. Image has been cropped.

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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.