Automatic Waiver of 50% Excise Tax

Take-Away: While we may grouse about many of the distribution changes under the SECURE Act, the automatic waiver of the 50% excise tax for the failure to take a year-of-death required minimum distribution (RMD) is a welcome change under the Act.

Background:  As we near the end of the calendar year, what happens if an individual who is obligated to take a required minimum distribution (RMD) dies before taking their distribution for 2022? Often a year-end death creates a crisis since the designated beneficiaries of the deceased’s IRA must confirm if the year-of-death RMD has already been taken; often those beneficiaries scramble to take the year-of-death RMD for this own income before the end of the calendar year. If the RMD was not withdrawn by the time owner’s death arrives, the beneficiaries have historically needed to get that RMD distributed before December 31.

Pre-SECURE Act: Prior to the SECURE Act’s Proposed Regulations released earlier this year, if the year-of-death RMD was not withdrawn by the end of the calendar year, a 50% excise tax was imposed on the RMD amount that was not withdrawn. If the deceased had failed to take his/her last RMD before their death, this 50% excise tax could be waived by the IRS for reasonable cause shown. The designated beneficiaries could complete IRS Form 5329 and report the missed amount. The designated beneficiary could also submit a letter to the IRS and explain the situations and attest that a missed RMD ‘will never happen again.’ Yet, before either of these steps the beneficiary must still withdraw the missed year-of-death RMD and move the withdrawn funds to whatever beneficiary-IRA that best meets the beneficiary’s needs.

Post-SECURE Act: Under the Proposed SECURE Act Regulations, in an automatic waiver of the 50% excise tax will be granted. Under the Proposed SECURE Act Regulations the automatic waiver of the 50% excise tax will apply if that RMD is taken by the designated beneficiary’s tax filing deadline, including extensions.

Example: Edna, age 79, has a traditional IRA. Her granddaughter Jean, age 24, is the sole designated beneficiary of Edna’s IRA. Edna’s annual RMD is normally paid on December 20 of each year. However, Edna died on December 15, 2022. Consequently, Edna died before taking her last RMD from her IRA. Jean is responsible to take Edna’s 2022 year-of-death RMD. However, with such a short period before the end of 2022, and while Jean is distracted with taking final exams while she is in medical school, Jean misses the December 31, 2022 deadline in which to take Edna’s RMD. Jean is now able under the Proposed SECURE Act Regulations for an automatic waiver of the 50% excise tax if she takes the 2022 year-of-death RMD by her tax filing deadline (April 15, 2023), plus any filing extensions for which Jean may be eligible. Jean does not have to file Form 5329 and beg for mercy from the IRS.

Conclusion: While the SECURE Act has created a fair amount of controversy, and clearly considerable confusion when it comes to distributions from inherited IRAs, the automatic waiver of the 50% excise tax for the failure to timely take the year-of-death RMD by December 31 comes as some relief. I am fairly confident in saying that this relief does not off-set the Act’s 10-year distribution rule for most designated beneficiaries, I will take whatever I can get from Congress these days.