On July 19, 2024, the IRS released the final regulations relating to required minimum distributions (RMDs) from the SECURE and SECURE 2.0 Acts. This article will discuss some of the changes provided by the final regulations.
The SECURE 2.0 Act has significantly changed RMD rules, most notably raising the age at which individuals must begin taking RMDs to 73, effective for individuals reaching age 72 in 2023 and beyond. Prior to the SECURE 2.0 Act, individuals were required to start taking RMDs from their retirement accounts at age 72.
For example, if a taxpayer reached age 73 in 2024, their first RMD would be required in 2024 and it would be calculated based on the balance at the end of 2023.The first RMD can be taken by April 1st of the year following when the taxpayer turns 73 but that means the taxpayer has to take two RMDs in that year. For the example above, the taxpayer could wait to take their RMD in 2025 (before April 1), but they would need to take the RMD for 2024 and 2025 in 2025.
The calculation method for RMDs remains largely unchanged, but it is critical to use the correct life expectancy tables based on the new RMD age.
Division of Designated Beneficiaries Under SECURE Act 2.0
An eligible designated beneficiary (EDB) under the SECURE 2.0 Act is an individual who can inherit an IRA or 401(k) account and is subject to certain distribution requirements:
Who qualifies as an Eligible Designated Beneficiary (EDB)
An EDB can be a surviving spouse, a minor child, a disabled or chronically ill individual, or someone who is no more than 10 years younger than the deceased account owner.
- Distribution options
An EDB can take the entire amount in a lump sum, withdraw the balance over their lifetime, or empty the account within 10 years.
- Exceptions
There are some exceptions for EDBs, including a minor child who reaches the age of majority is no longer considered an EDB after age 21. There are other exceptions for spouses, including a spouse being able to treat the account as their own or they can decide to become a non-eligible designated beneficiary anytime during the 10-year period with stipulations.
Who qualifies as a Non-Eligible Designated Beneficiary
A “non-eligible designated beneficiary” under the SECURE Act 2.0 refers to an individual who is named as a beneficiary of a retirement account but does not meet the specific criteria to be considered an “eligible designated beneficiary.” They must withdraw the inherited funds within a 10-year period, unlike eligible beneficiaries who can stretch out withdrawals over their life expectancy. Most non-spouse beneficiaries fall under this category under the current rules for example most adult children of the decedent fall into this category.
- Distribution Options
The primary characteristic of a non-eligible designated beneficiary is the requirement to distribute the inherited retirement account within 10 years of the account owner’s death.
- Distinction from eligible designated beneficiaries:
While some beneficiaries, like a spouse or a disabled child, can qualify as “eligible designated beneficiaries” and utilize their life expectancy to calculate withdrawals, non-eligible designated beneficiaries cannot.
RMD & Distribution requirements
If the original account owner began taking required minimum distributions (RMDs) or reached the age required to take RMDs, the beneficiary must take RMDs each year. If the account owner does not begin taking RMDs or the retirement account is a ROTH account, the beneficiary does not have to take RMDs and either needs to empty the account in 10 years (non-eligible designated beneficiaries) or rollover to an inherited account (EDB) and take distributions as they would like.
New rule for Surviving Spouses
This new rule is effective in 2024, it allows surviving spouses to be treated as the deceased employee for RMD purposes where the spouse is designated as the sole beneficiary and RMDs have not yet begun. This provision effectively negates the need under prior law to roll the deceased spouse’s plan interest into an IRA to receive a more favorable distribution period. Distributions are not required to begin earlier than the applicable age date of the deceased employee.
If a surviving spouse initially uses the 10-year rule and later decides that they’d like to treat the deceased spouse’s IRA as their own (complete spousal rollover) they will need to ‘make up’ any RMDs they would have needed to have taken had the funds been hypothetically been in their IRA all along.
Penalty Relief Provision Under SECURE Act 2.0
There will be no additional excise tax penalty for missed RMDS for 2021, 2022, 2023 & 2024.
One provision coming out of IRS final regulations is that penalties from missed RMD’s beginning after January 1, 2025, will be enforced. The reduction of the 50 percent penalty to 25 percent, and to 10 percent if the missed RMD was made up within two years. The penalty reduction has been in effect since January 1, 2023
While there is no catch up required for the missed RMDs, they were technically still required to be taken during those years even though there will be no penalty accessed on the missed RMD payments.
There is an automatic waiver of penalties for the year in which there is a RMD shortfall for certain beneficiaries. This gives most beneficiaries up to December 31st of the year after death to satisfy the decedent’s year-of-death RMD.
By John Bilotti, CPA, and Michelle Flinn, CPA