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George F. Bearup, J.D. Senior Legal Trust Advisor

11-Oct-22

RMD Relief

Take-Away: The IRS has granted relief from penalties for those designated beneficiaries who failed to take a required minimum distribution from an inherited IRA under the SECURE Act Proposed Regulations. The bad news is that the IRS is sticking with its interpretation of the SECURE Act requiring annual required minimum distributions taken by the designated beneficiary if the IRA owner was over the age 72 at death.

Background: The IRS’ Proposed Regulations on the SECURE Act threw everyone a curve ball when the Proposed Regulations provided that the designated beneficiary of an inherited IRA had to take annual required minimum distributions (RMDs) if the deceased IRA owner was over his/ her required beginning date (RBD) at the time of his/her death. In other words, the designated beneficiary could not delay taking any RMDs until the 10th anniversary of the IRA owner’s death. For many designated beneficiaries who thought that they had the discretion under the SECURE Act to delay taking any RMDs for up to 10 years, the position taken by the IRS in its SECURE Act Proposed Regulations exposed those designated beneficiaries to penalties for their failure to take an annual RMD in 2021 or 2022.

The Surprise Proposed Regulation: The surprise was that everyone was thinking that the SECURE Act gave all designated beneficiaries, other than eligible designated beneficiaries, the option to delay taking any RMD until the 10th anniversary of the IRA owner’s death. The IRS’s Proposed Regulation focused on IRC 401(a)(9)(B)(i) and concluded that the beneficiary of an IRA owner who died after the owner’s required beginning date (RMD) must take annual RMDs beginning in the first calendar year after the calendar year of the IRA owner’s death. In order to satisfy the amended Tax Code, the remaining account balance of the inherited IRA must be fully distributed by the 10th calendar year after the calendar year of the IRA owner’s death. [IRC 401(a)(9)(B)(ii).]Thus, in order to satisfy both of those requirements, the Proposed Regulations provide that when the IRA owner dies after his/her RBD with a designated beneficiary who is not an eligible designated beneficiary, (i) annual RMDs must continue to be taken after the IRA owner’s death, (ii)with a full distribution of the balance of the inherited IRA required by the end of the 10th calendar year following the calendar year of the IRA owner’s death.

Notice 2022-53: On October 7, 2022, the IRS published its Notice 2022-53 which announced that it will not impose penalties on the failure of a designated beneficiary  to take specified RMDs for 2021 and 2022 that were required under the provisions of the 2019 SECURE Act Proposed Regulations issued to deal with changes in RMDs under the Act. The IRS noted that a number of commentators had indicated that they had not interpreted the law in this fashion requiring both requirements to be met and, for that reason, many designated beneficiaries who had inherited IRA accounts from decedents who were  in-pay status had not taken any distributions in 2021. Since the IRS did not release its SECURE Act Proposed Regulations until February 24, 2022, it was too late for many designated beneficiaries to timely take any such required distribution for 2021.

  • Accordingly, the provisions of the Proposed Regulations will apply no earlier than 2023: “To the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under IRC 4974. If a taxpayer has already paid an excise tax for a missed RMD in 202 that constitutes a specified RMD, that taxpayer may required a refund of that excise tax.”
  • The Notice also provides relief to defined contribution retirement plans that did not make a specified RMD to a designated beneficiary: “A defined contribution plan that failed to make a specified RMD will not be treated as having failed to satisfy Section 401(a)(9) merely because it did not make that distribution.”

Conclusion: So the good news is that those designated beneficiaries who failed to take an RMD is 2021 (or 2022) will not be punished by the imposition of a 6% penalty for their failure to take an RMD. The bad news is that the IRS is sticking with its interpretation of the Tax Code and it will require annual RMDs taken by designated beneficiaries from an inherited IRA if the IRA owner was beyond his/her RBD when they died.