Final RMD Rules: Distribution Options for Eligible Designated IRA Beneficiaries

Editor’s note: This is the second in a two-part series. The first part focused on designated and non-designated beneficiaries.

The distribution options available to an eligible designated beneficiary are more generous than those that apply to other beneficiaries. Eligible designated beneficiaries were introduced under SECURE Act 1.0 and generally apply only to IRAs inherited after 2019. These eligible designated beneficiaries are the only class of post-2019 beneficiaries who are permitted to take distributions over their full applicable life expectancy.

Important reminders:

• These explanations are high-level and could be impacted by whether a beneficiary is one of multiple beneficiaries.
• In multiple beneficiary cases, the separate account rules and the types of beneficiaries could impact the available options and are beyond the scope of this article. The assumption for this article is that there is only one primary beneficiary of the IRA.
• Roth IRA owners are not subject to Required Minimum Distributions (RMDs) and have no Required Beginning Dates (RBDs). 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. These rules also apply to designated Roth accounts (DRA) 2024 and after.

Who is an eligible designated beneficiary

If the IRA owner died after 2019, the distribution options are determined by whether the IRA owner died before their RBD, whether the beneficiary is non-designated, designated beneficiary, or eligible designated beneficiary. An eligible designated beneficiary is a designated beneficiary who, at the time of the IRA owner’s death, is:

1. the surviving spouse of the IRA owner,
2. a child of the owner who has not reached the age of 21,
3. disabled,
4. a chronically ill individual or
5. an individual who is not “more than 10 years younger” than the IRA owner.

To determine if a minor is an eligible designated beneficiary, a child includes stepchildren, adopted children, and foster children placed with the IRA owner by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

For purposes of determining whether someone is disabled or chronically ill, certain documentation must be provided to the administrator of the participant’s employer plan account by October 31 of the calendar year following the calendar year of the employee’s death or October 31, 2025, if later. Those documentation requirements do not apply to IRAs.

The determination of whether a beneficiary is not more than 10 years younger than the IRA owner is made on a fiscal year basis, based on the date of birth of both the IRA owner and the beneficiary. For example, if an IRA owner’s date of birth is October 1, 1953, the beneficiary is not more than 10 years younger if they were born on or before October 1, 1963.

A. If the IRA owner died before their RBD: Traditional IRA and Roth IRA

The options depend on whether the beneficiary is a nonperson, a designated beneficiary, or an eligible designated beneficiary.

If the IRA owner or plan participant dies before the RBD, the terms of the governing agreement should be consulted to determine whether the life expectancy option is the default and what steps must be taken to choose a different option.

B. If the IRA owner died on or after their RBD: Traditional IRA only

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.

Rule that penalized older eligible designated beneficiaries withdrawn

The proposed RMD regulations include a provision penalizing an eligible designated beneficiary older than the IRA owner. Under those proposed regulations, an eligible designated beneficiary was permitted to take distributions over the decedent’s longer life expectancy but was required to fully distribute the IRA when the beneficiary’s life expectancy ended. The final regulations removed this rule.

Example: In 2022, 80-year-old Jack inherited an IRA from his 75-year-old brother, Tim, valued at $500,000.

Because Jack is older than Tim, he is eligible to take distributions over Tim’s life expectancy.

Assuming a rate of return of 7%, Jack’s RMDs would be as follows:

Although Jack’s life expectancy in 2033 was 3.8 more years, the proposed RMD regulations required him to fully distribute the account no later than 2033—and Jack would have lost the opportunity to continue accruing tax-deferred earnings for three more years. But, with the changes made by the final regulations, Jack now can continue tax deferral until 2036 if he wants to—and spread the income over those additional years.

Special mention: RMDs repealed for owners of designated Roth accounts

The SECURE 2.0 Act repealed the RMD requirement for designated Roth Accounts (DRAs) effective 2024. DRAs are Roth 401(k), Roth 403(b), and Roth 457(b) accounts. As a result of this change, beneficiaries of DRAs are split into two categories: those who inherited a DRA before 2024 and those who inherited a DRA in 2024 and after.

The options available to beneficiaries who inherited a DRA before 2024 are determined by whether the DRA participant died before their RBD, or on or after their RBD.

For those who inherit a DRA 2024 and after, the pre-RBD rules that apply to traditional accounts always apply to them, regardless of the age at which the DRA participant dies.

The buck doesn’t stop with primary beneficiaries

Discussions about beneficiary options must include planning beyond the primary beneficiary to include successor beneficiaries. Generally, the successor beneficiaries’ only option is to continue the distribution schedule available to the primary beneficiary. However, if the primary beneficiary takes distribution over their full applicable life expectancy, the maximum continuation period is 10 years if such a primary beneficiary dies after 2019.

Consequently, a comprehensive estate plan includes planning for the account owner and their primary and successor beneficiaries.

Planning opportunities and fixes for shortfalls

Taking RMDs will avoid the excise tax that would apply to shortfalls. But, sometimes, it is more tax-efficient for a beneficiary to take more than their RMD. Consider, for instance, a beneficiary subject to the 10-year rule—if they take only their annual RMD, they would have a balloon amount due in the 10^th year, significantly more than their annual RMDs. Therefore, projections should be made to mitigate any tax impact.

What if a beneficiary takes less than their RMD? If the shortfall is due to reasonable error, their tax preparer may file IRS Form 5329 and follow the procedures provided in the instructions to request a waiver of the excise tax.