Editor’s note: This is the first in a two-part series. Part One focuses on beneficiaries who are designated and non-designated beneficiaries. Part Two will focus on eligible designated beneficiaries.
The IRS published long-awaited final regulations on required minimum distributions in July. These regulations generally retain provisions in the proposed RMD regulations with some modifications. One of the key provisions finally settled in these final RMD regulations is the distribution options available to beneficiaries of IRAs and employer plans—collectively IRA for the purpose of this article.
While these explanations generally apply to IRAs and employer plans, IRAs are the focus.
Important: The following explanations are high-level and could be impacted by factors not covered, including the rules that apply to certain annuities and defined benefit pension plans and whether a beneficiary is one of multiple beneficiaries. In this article, the assumption is that the beneficiary is the only primary beneficiary of the IRA.
Background and history
Before these final RMD regulations, the most recent ones were published in 2002. These (new) final RMD regulations reflect amendments by provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), enacted on December 20, 2019, as Division O of the Further Consolidated Appropriations Act, 2020 and SECURE 2.0 Act of 2022 (SECURE 2.0), enacted on December 29, 2022, as Division T of the Consolidated Appropriations Act, 2023.
The distribution options covered in this article reflect the provisions of these new final regulations.
Knowing the RBD for an IRA owner is important
Knowing whether an IRA owner died before their required beginning date (RBD) is important for determining the distribution option that applies to their beneficiary.
The RBD is April 1 of the year that follows the year the IRA owner reached their applicable age.
The applicable age for an IRA owner depends on the IRA owner’s date of birth. The dates of birth and corresponding applicable ages are as follows:
| Table 1: RMD Start Dates for Various Birthdates and Ages |
| Year/date of birth |
Applicable age when RMDs begin |
| June 30, 1949, and earlier |
The year they attained age 70½ |
| July 1, 1949–December 31, 1950 |
The year they attained age 72 |
| January 1, 1951–December 31, 1958 |
The year they attain age 73 |
| January 1, 1959–December 31, 1959 |
The year they attain age 73 |
| January 1, 1960, and after |
The year they attain age 75 |
| Please Note: The first RMD must be taken by April 1 of the year after the Applicable RMD Age. This April 1 date is the required beginning time. |
Source: Appleby RMD Quick Reference Guide for IRAs
An employer plan can provide that the applicable age is the year the participant retires if that is later than the ages in the table above.
Additional essential information for determining beneficiary options
When determining the distribution options for a beneficiary, advisors must know certain key pieces of information, including the following:
- Whether the IRA owner died before 2020, in which case the Pre-SECURE Act rules apply. If the owner died after 2019, the SECURE Act rules apply.
- The date of birth and date of death of the IRA owner. This will allow one to determine whether the IRA owner died before their RBD.
- The date of birth of the beneficiary.
- Whether the account is a traditional or Roth IRA, because some rules that apply to traditional IRAs do not apply to Roth IRAs.
- How the beneficiary is related to the IRA owner. The options for this purpose are
- Surviving spouse
- Nonspouse
- Nonperson
- Child (for IRAs inherited after 2019). And,
- For IRAs inherited after 2019, whether the beneficiary is disabled or chronically ill.
Advisors must also know whether the beneficiary is one of multiple beneficiaries, which could affect the options available to the beneficiary. However, rules that affect multiple beneficiaries are not covered in this issue.
Reminders:
- For Roth IRAs: Roth IRA owners are not subject to RMDs; therefore, the options available to the beneficiary of a Roth IRA are the same as those that apply to a traditional IRA when the owner dies before their RBD.
- Life Expectancy Table: When calculating annual RMDs for an inherited IRA, the Single Life table must be used to determine the life expectancy factor.
- Life expectancy rule: This refers to distributions from a beneficiary IRA over the applicable life expectancy.
Distribution options for beneficiaries that are designated and non-designated beneficiaries
A designated beneficiary is an individual designated as a beneficiary for an IRA.
A beneficiary is not a designated (non-designated beneficiary) if the beneficiary is not an individual. An exception applies to a see-through trust, allowing the trust beneficiary to be treated as a designated beneficiary for RMD purposes. IRA owners and beneficiaries should consult with their estate planning attorney to determine if a trust is a see-through trust.
When calculating RMD for inherited IRAs, the Single Life Table must be used.
The options for a designated and a non-designated beneficiary are as follows.
A. If the IRA owner died before 2020
If the IRA owner died before 2020, the distribution options are as follows.
a) If the IRA owner died before their RBD: Applies to traditional and Roth IRAs
The options are the five-year and life expectancy rules, with additional options for a spouse beneficiary.
| Table 2: Beneficiary Options Summary
|
| Nonperson |
Designated beneficiary |
| |
Nonspouse |
Spouse |
|
|
- 5-year rule, or
- Life expectancy rule
|
- 5-year rule
- Life expectancy rule
- Treat as own
- Rollover to own IRA or employer plan account
|
Notes:
- Under the five-year rule, distributions are optional for the four years following the year the IRA owner died, and the inherited IRA must be fully distributed no later than the fifth year.
- For designated beneficiaries, the RMD regulations default to the life expectancy rule. However, the terms of an IRA agreement or plan document may default to the five-year rule. Check to be sure.
- Under the life expectancy rule:
- Distributions are made over the beneficiary’s life expectancy, beginning the year following the IRA owner’s death.
- If the beneficiary is the surviving spouse, distributions would begin the later of: (a) the year following the year of the IRA owner’s death and (b) the year the IRA owner would have reached their applicable age.
|
b) If the IRA owner died on or after their RBD: Applies to traditional IRAs
The option is to take distributions over the beneficiary’s life expectancy or the remaining life expectancy of the decedent, whichever is longer, beginning the year following the year of the IRA owner’s death. With additional options for a spouse beneficiary.
| Table 3: Beneficiary Options Summary |
| Nonperson |
Designated beneficiary |
| |
Nonspouse |
Spouse |
|
|
|
- Life expectancy rule
- Treat as own
- Rollover to own IRA or employer plan account
|
Notes:
- For a nonperson beneficiary, distributions are made over the remaining life expectancy of the decedent.
- For designated beneficiaries, distributions are made over the decedent’s remaining life expectancy or the beneficiary’s life expectancy, whichever is longer.
|
B. If the IRA owner died after 2019
If the IRA owner died after 2019, a spouse beneficiary is an eligible designated beneficiary. (Eligible designated beneficiaries are covered in Part Two of this series.)
a) If the IRA owner died before their RBD: Applies to traditional and Roth IRAs
The options for a non-designated beneficiary are the same as those that apply to IRAs inherited before 2019, but the rules for a designated beneficiary have changed.
| Table 4: Beneficiary Options Summary |
| Nonperson |
Designated beneficiary |
|
|
|
Notes:
- Under the 5-year rule, distributions are optional for the four years following the year the IRA owner died, and the inherited IRA must be fully distributed no later than the fifth year.
- Under the 10-year rule, distributions are optional for the nine years following the year the IRA owner dies, and the inherited IRA must be fully distributed no later than the 10th
year.
|
b) If the IRA owner died on or after their RBD: Applies to traditional IRAs
The option is to take annual distributions over the beneficiary’s life expectancy or the remaining life expectancy of the decedent, whichever is longer, beginning the year following the year of the IRA owner’s death. In addition, a designated beneficiary must fully distribute the inherited IRA no later than the 10th year following the year of the IRA owner’s death.
| Table 5: Beneficiary Options Summary |
| Nonperson |
Designated beneficiary |
|
|
- Life expectancy rule AND the 10-year rule combined
|
Notes:
- For a nonperson beneficiary, distributions are made over the remaining life expectancy of the decedent.
- For designated beneficiaries, distributions are made over the beneficiary’s life expectancy and the inherited IRA must be fully distributed no later than the 10th year after the IRA owner’s death.
- While an excise tax is owed on any RMD not taken for a year, it was automatically waived for designated beneficiaries from 2021 through 2024.
|
There are more rules to consider
This issue provides a high-level explanation of the RMD rules that apply to beneficiaries and the options when there is only one beneficiary of an IRA. Many exceptions apply, including when an IRA has multiple beneficiaries and how that affects the RMD options and obligations for each beneficiary. Advisors must obtain all pertinent information to inform beneficiaries about their distribution options.
Reminder: These explanations cover RMDs. But more than the RMD can be taken at any time.