In December of 2019, the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) introduced a new 10-year rule for beneficiaries of retirement plans and IRA accounts, which took effect for account holder deaths starting in 2020. Under this rule, beneficiaries who are not eligible designated beneficiaries for an exception to the 10-year rule must take required minimum distributions (RMDs) annually before emptying the account by the end of the tenth year following the account holder’s death. There is a key difference between the old 5-year rule and the new 10-year rule. Under the new rule, annual RMDs are required for beneficiaries subject to the 10-year rule, while they were not required under the old 5-year rule. Typically, significant penalties apply for failing to take RMDs as required.
The IRS granted transition relief for beneficiaries who are subject to this new 10-year rule for failing to take RMDs in 2021 and 2022. IRS Notice 2022-53 acknowledged that many individuals believed the new 10-year rule would operate similarly to the 5-year rule, where RMDs were not due until the last year of the 5-year period. Due to this confusion, the IRS provided transition relief for those who failed to take distributions in 2021 or 2022 in the case of the death of an employee or designated beneficiary subject to the new 10-year rule in 2020 and 2021. Beneficiaries who already paid an excise tax for missed RMDs in 2021 and 2022 may also request a refund.
Then in 2023, the IRS issued IRS Notice 2023-54, which further extended transition relief from IRS Notice 2022-53 to 2023 as well. In 2023, like in 2021 and 2022, these beneficiaries who did not take RMDs in 2023 will not be subject to the 50% excise tax penalty. As of the time of this writing, RMDs will be required starting in 2024 and beyond for beneficiaries subject to the new 10-year rule.
If the designated beneficiary is an eligible beneficiary, the rules apply differently. An eligible designated beneficiary includes the surviving spouse of the employee, a minor child of the employee, someone who is disabled or chronically ill, or someone who is less than 10 years younger than the deceased account holder. The eligible beneficiary can choose to follow the new 10-year rule or take distributions based on their own life expectancy or the account holder’s life expectancy, whichever is longer.
Required minimum distributions must be taken by December 31st of each year they are required. Beneficiaries must include any taxable distributions they receive in their gross income. An RMD may be taken in a lump sum, ratably throughout the year, or in other amounts, as long as the RMD amount is met. For more information on RMD rules, please visit this IRS page.