New IRS rules on RMDs in the year of death

Below is an excerpt from the IRS's final regulations on RMD in the year of death:

“If an individual who is required to receive a distribution in a calendar year dies before receiving that distribution and has designated more than one beneficiary, any of those beneficiaries may satisfy the individual's requirement to receive a distribution in that calendar year, rather than requiring each of the beneficiaries to receive a pro rata share of the undistributed amount..”

The IRS's RMD rule in the year of death can be beneficial in several situations. One such situation is when a nonprofit organization was named as the account beneficiary. Withdrawing the charity's percentage could cover the remainder of last year's RMD. Another situation is when one of the named beneficiaries needs cash. Withdrawing last year's remaining RMD by that beneficiary could potentially cover the remainder of the RMD in the year of death, allowing the other beneficiaries to avoid an immediate withdrawal.

How is the RMD distributed for the year of death?

When an owner of a traditional IRA subject to RMD dies, the IRA administrator typically first opens an “inherited” account for the designated beneficiary(s), transfers the IRA assets to the inherited IRA account, and then pays the IRA RMD for the year of death from the inherited IRA account.. Education 1099-R (distributions from pensions, annuities, retirement savings from profit-sharing plans, IRAs, etc.)) for the withdrawal. The Form 1099-R issued for the withdrawal will include the beneficiary's Social Security number and taxpayer identification number and will be coded as a “death withdrawal” and will not be subject to an early withdrawal penalty. The withdrawal will be on the beneficiary's personal tax return, not the estate's tax return or the decedent's final tax return. Therefore, the beneficiary is responsible for paying all federal and state income taxes due on the RMD in the year of death. The following example illustrates this:

Example 1. Grandpa Jones leaves his $200,000 traditional IRA to his four grandchildren. Each grandchild is to receive 20% of the IRA. Grandpa Jones names a charity as the beneficiary of the final 20%. Grandpa Jones dies at age 87 without taking his final RMD of $200,000/14.4, or $13,889. His charity receives a full distribution of its 20% of $200,000, or $40,000, as the beneficiary share. The $40,000 share more than covers Grandpa Jones' RMD in the year of death, so the four grandchildren do not receive immediate distributions.

RMD deadline and penalty for the year of death

Previously, the deadline for taking RMDs in the year of death was December 31 of the year of death. If the death occurred late in the year (late November or in December), this tight deadline was often missed, causing unnecessary stress for IRA beneficiaries. Note that the penalty for missing an RMD is 25 percent of the amount not taken. This penalty has been reduced to 10 percent if the missed RMD is corrected in a timely manner.

The IRS's proposed regulations provided for an automatic waiver of the missed RMD penalty if the RMD for the year of death was taken by the beneficiary's tax filing deadline, including extensions. This is definitely a welcome relief. However, in the final regulations, the IRS went a step further and extended the deadline to take the RMD for the year of death even further. Here is the summary of the final regulations regarding the RMD deadline for the year of death:

New IRS rules on RMDs in the year of death

“The final regulations extend the deadline within which the beneficiary can receive the missed required minimum distribution and qualify for the automatic waiver. The new deadline will be the later of the tax return filing deadlines for the tax year beginning with or within the calendar year in which the individual died and the end of the following year.”

For most beneficiaries of traditional IRAs, this means that the RMD deadline for the year of death is now December 31 of the year following the year of death. The following example illustrates this:

Example 2. Grandma Mary, age 84, has a traditional IRA. Grandma Mary's sole beneficiary of her IRA is her granddaughter, Elizabeth, age 25. Grandma Mary typically takes her traditional IRA RMD on December 15 of each year. Grandma Mary died on December 10, 2023, five days before she took her traditional IRA RMD for 2023.

Elizabeth is responsible for taking the IRA RMD for the year of death, 2023. However, in her grief and confusion, she neglected to take it before December 31, 2023.

But according to the final provisions, Elizabeth is eligible for an automatic forgiveness of the 25% missed RMD penalty if she takes the RMD for the year of death, 2023, by December 31, 2024. Because the IRA administrator has already set up an “inherited” IRA for Elizabeth and rolled Grandma Mary's traditional IRA into Elizabeth's inherited IRA, Elizabeth can simply take the RMD for the year of death from her inherited IRA sometime before December 31, 2024. She will receive a 1099-R for 2024 and will owe federal and state income taxes on the distribution, which she must report on her 2024 federal and state income tax returns.