New required minimum distribution rules for beneficiaries create uncertainty regarding RMD liability.

UPDATE: As anticipated in this article, in early October 2022, the IRS issued Notice 2022-53 waiving the RMDs described below for calendar years 2021 and 2022. More recently, the IRS extended for 2023 the RMD waiver that it provided for tax years 2021 and 2022. See “IRS Announces 2023 RMD Waivers for Some Beneficiaries of an Inherited IRA.”

In late December 2019, Congress enacted the SECURE Act, which, among other things, amended the rules governing required minimum distributions (RMDs) payable to a beneficiary of an owner of an IRA or a beneficiary of a participant in an “individual account plan”¹ who died on or after January 1, 2020. In general, these new rules eliminated the “stretch” IRA, which had allowed certain beneficiaries to withdraw distributions from the inherited IRA over their lifetimes. Instead, under the new rules the beneficiaries would be required to withdraw all assets in the inherited IRA within 10 full calendar years following the IRA owner’s death.

Due to the pandemic, Congress waived the 2020 requirement to withdraw RMDs from IRAs, so the new rules addressed in this portion of this article became effective January 1, 2021. These rules are complex and, except when necessary, will not be addressed in detail in this article. What will be addressed is how the new RMD rules impact individuals who can answer “yes” to the following four questions:

• Have you been named as a beneficiary of an individual who owned an IRA (other than a Roth IRA)?
• Did the individual who named you as a beneficiary die on or after January 1, 2020?
• Are you someone other than any of the following four types of beneficiaries: a surviving spouse²; a child of the decedent under the age of 21; a beneficiary who is not more than 10 years younger than the decedent; or an individual who is disabled or chronically ill?
• Had the decedent already reached his or her required beginning date (RBD) before dying?³ An individual reaches his or her RBD depending on when the individual was born. If born prior to July 1, 1949, the individual reaches his or her RBD if alive on the April 1 following the calendar year in which the individual attained age 70 ½. If born on or after July 1, 1949, the individual reaches his or her RBD if alive on the April 1 following the calendar year in which the individual attained age 72. For example, if someone were born on June 1, 1949, that individual would have attained age 70 ½ on December 1, 2019, and would have reached his or her RBD if the individual were alive on April 1, 2020. If someone else was born on August 1, 1949, that individual would have attained age 72 on August 1, 2021, and would have reached his or her RBD if the individual were alive on April 1, 2022.

According to proposed regulations issued by the IRS in February 2022, if you can answer “yes” to the four questions, then you may have missed your RMD for 2021 and will also need to withdraw an RMD in 2022

UPDATE: As anticipated in this article, in early October 2022, the IRS issued Notice 2022-53  waiving the RMDs described below for calendar years 2021 and 2022. However, the IRS has not changed its interpretation for RMDs due in 2023 and beyond. See our October 17, 2022, article, “IRS Announces RMD Waivers for Some Beneficiaries of an Inherited IRA.”

Now for the reason for this discussion in this article: What was your RMD for 2021?

When Congress enacted the new rules in December 2019, effective for IRA owners dying on or after January 1, 2020, it was clear that the following three types of beneficiaries would be required to withdraw an RMD by December 31 of the calendar year following the decedent’s death if they wanted to “stretch” the distributions over their life expectancies.

These beneficiaries are:

• a child of the decedent under the age of 21 (although the “stretch” terminates when the child attains age 21);
• a beneficiary who was not more than 10 years younger than the decedent; and
• a beneficiary who is chronically ill or disabled.

For example, if your brother who was only five years older named you as beneficiary of his IRA and died on May 1, 2020, you could continue to stretch distributions from the IRA over your life expectancy so long as you took your first RMD by December 31, 2021.

What also seemed clear following the enactment of the new rules was the requirement that, if you were not one of the three beneficiaries described above or a surviving spouse, you had to withdraw all amounts held in the IRA by December 31 of the 10th full calendar year following the death of the decedent. No longer could you “stretch” the distributions over your life expectancy.

For example, if your mother died on May 1, 2020, and named you as beneficiary of her IRA, and you were 21 years of age or older, the only RMD requirement would be that all assets in the IRA must be distributed to you by December 31, 2030. For the first nine years following your mother’s death (years 2021–2019) there were no RMD requirements, but all assets must be distributed in the 10th year following the decedent’s death and no later than December 31, 2030.

It seemed pretty straightforward that, if you were not a surviving spouse or one of the three beneficiaries described above, you had no RMD requirement for 2021. Then, the IRS interpreted the new rules contained in the SECURE Act and issued proposed regulations in February 2022. These new regulations caught nearly everyone in the retirement planning community by surprise, including the writer of this article.

Contrary to what most of us thought, if the decedent had reached their RBD as of date of death, a beneficiary’s RMDs would commence by December 31 of the calendar year following the decedent’s year of death. These RMDs would continue through years 1-9 following the decedent’s year of death, with the beneficiary being required to withdraw all remaining assets in the IRA no later than December 31 of the 10th year following the decedent’s death.

For example, assume your father, age 75, died on June 1, 2020, and named you as beneficiary of his IRA. Your father had reached his RBD and had been taking RMDs from his IRA for several years prior to his death. It is clear that you will be required to withdraw all assets in the IRA by December 31, 2030. But, in addition, under the IRS’s proposed regulations, you also had the requirement to withdraw an RMD by December 31, 2021, and will also be required to withdraw RMDs for each of the calendar years 2022-2029. The amount of the RMD you must withdraw will be discussed in the second part of this article.

Accordingly, if you answered all four questions at the beginning of this article “yes,” then under the IRS’s proposed regulations you had an RMD due by December 31, 2021. The penalty for not taking your RMD by its due date is 50% of the amount that should have been distributed. Because the IRS issued its proposed regulations after December 31, 2021, which admittedly caught nearly the entire retirement planning community by surprise, it is doubtful that the IRS will impose the 50% penalties on missed RMDs.

We need to wait for another couple of months to see whether the IRS will waive any penalties for 2021, or maybe Congress will enact a technical corrections bill eliminating any requirement to withdraw RMDs in years 1-9. If the IRS waives penalties for 2021, it may also require withdrawal of the 2021 RMD by December 31, 2022. And, of course, because we now know the IRS’s position on this matter, if you answered “yes” to the four questions, you will have an RMD for 2022.

New Actuarial Tables for Calculating RMDs

The IRS has also updated its actuarial tables for calculating RMDs payable to:

• individuals who own IRAs and have attained their RBD and
• beneficiaries who have inherited an IRA.

These new tables are effective for calculating RMDs payable in calendar year 2022 and future years. Because life expectancies have increased, the new tables lower the amount of RMDs payable during the life of an IRA owner or beneficiary as compared to the tables in effect prior to 2022. The two new tables are referenced below.

The first table (“Age of employee distribution period”) is the applicable divisor that applies to an owner of an IRA who has attained his or her RBD. This new table requires you to distribute in 2022 the value of the IRA as of December 31, 2021, divided by the joint life expectancy of you and a “deemed” beneficiary who is 10 years younger than you (regardless of the actual identity of your beneficiary, unless your beneficiary is a spouse more than 10 years younger than you, in which case a different actuarial table applies, based on the joint life expectancies of you and your more-than-10-year-younger spouse).

For example, assume you will have your 75th birthday in 2022, and your IRA is worth $500,000 on December 31, 2021. The actuarial table shows the joint life expectancy of you and a 65-year-old “deemed” beneficiary is 24.6 years. Your RMD in 2022 is $21,325 ($500,000 ÷ 24.6). You are also allowed to recalculate the joint life expectancy of you and your deemed 10-year younger beneficiary each year. For example, if you attain age 76 in 2023, the joint life expectancy of you and your deemed 66-year-old beneficiary is 23.7 years.

The second table (“Single Life Expectancy Table”) is the applicable divisor that applies if you are a beneficiary of an inherited IRA and are required to withdraw an RMD for the current year. As described in the first portion of this article, most beneficiaries of an IRA will not have an RMD for years 1-9 following a decedent’s death. For three types of beneficiaries, described in the preceding portion of this article, who can stretch their distributions from an IRA over their life expectancies or who are required to withdraw RMDs in years 1-9 because the decedent died after reaching his or her RBD, the second table applies.

For example, assume your father died on May 1, 2021, at age 75 and you will be age 45 on your birthday during the 2022 calendar year. Because your father had attained his RBD, under the IRS’s proposed regulations you are required to withdraw an RMD in 2022. Assume the value of your inherited IRA is $500,000 on December 31, 2021. The actuarial table shows that your life expectancy in 2022 as a 45-year-old is 41 years. Your RMD in 2022 is $12,195 ($500,000 ÷ 41). If Congress does not enact a technical corrections bill changing the RMD requirements during years 1-9, you will also have RMDs in the years 2023 through 2030. Unlike the calculation of life expectancies if you are the owner, as opposed to a beneficiary of an IRA, you do not recalculate your life expectancy in each ensuing year. Accordingly, your RMD in 2023 is still based on your life expectancy in 2022 of 41 years, less one. In 2024 you will subtract two from 41, and so on. For example, if the value of your inherited IRA on December 31, 2023, is $400,000, your RMD in 2024 will be $10,256 ($400,000 ÷ 39 [41 – 2]).

As mentioned at the beginning of this article, these concepts are complex. If you believe you may have missed a 2021 RMD under the IRS’s interpretation of RMDs payable to beneficiaries of IRAs where the decedent had reached his or her RBD before date of death, you may contact anyone at the Frazer Ryan Goldberg & Arnold law firm or the Whetstine Law Firm to discuss what action you should take at this time.

¹ An individual account plan is, generally, a 401(k), profit sharing, 403(b) or 457(b) plan. Defined benefit pension plans are not subject to these new rules. In most instances, a beneficiary of an individual account plan will directly transfer the benefits in one of those plans to an “inherited IRA.” Accordingly, for the remainder of this article, reference will be made only to RMDs from an IRA.

² In general, the new rules do not impact the options available to a surviving spouse who is beneficiary of an IRA, including rolling the IRA over to the surviving spouse’s own IRA. Accordingly, if you are the decedent’s surviving spouse the changes described in this portion of the article do not apply to you.

³ An owner of a Roth IRA does not have an RBD. Regardless of the age of the owner of a Roth IRA as of his or her date of death, the general 10-year rule described in this article applies to beneficiaries of a Roth IRA with no RMDs in years 1-9.

For questions concerning your RMD liability, contact Chuck Whetstine or your Frazer Ryan estate planning attorney.