The IRS is offering a breather for taxpayers tied to certain specified required minimum distributions (RMDs) for 2024. And if it feels like deja vu all over again, you’re not wrong. The IRS is allowing taxpayers some extra grace related to interpreting the RMD rules for inherited IRAs.

By law, you are required to withdraw funds from your retirement account each year after you reach age 73 (climbing to 75 in 2033). That amount is referred to as a required minimum distribution, or RMD. Typically, the amount you’re required to withdraw is figured each year by dividing your previous end-of-year account balance by your life expectancy. You’ll find your life expectancy factor in IRS Publication 590-B.

Inherited IRAs

If you inherit a retirement account, however, the rules are a bit different—made even more so thanks to the SECURE Act.

Before the SECURE Act, if you inherited a retirement account, you could minimize the tax consequences by taking distributions over your own life expectancy. Under the new rules, if you inherit a retirement account, you can withdraw all the money as a lump sum or over ten years—which earned it the cleverly-named 10-year RMD Rule.

(Some beneficiaries are exempt from the 10-year RMD Rule, including surviving spouses and children under 21 of the IRA owner, disabled and chronically ill persons, and a person who isn’t more than 10 years younger than the account holder.)

The rules can be tricky, but generally, the 10-year RMD rule requires that all assets in the inherited IRA must be fully withdrawn by the end of the 10th year following the original IRA owner’s death (in the case of a minor child beneficiary, once they reach the age of majority, the 10-year RMD rule kicks in). That sounds easy—but it created some confusion. Some beneficiaries interpreted the language to mean they could wait until the end of the 10-year window to make a complete withdrawal—meaning that they didn’t have to make regular withdrawals every year for 10 years. After all, that was consistent with the old five-year rule for certain inherited IRAs.

The proposed guidance suggested the opposite. In 2022, the IRS announced in Notice 2022-53 that, under the proposed regulations, beneficiaries subject to the 10-year RMD Rule must continue to take annual distributions after the IRA owner’s death, with a total distribution made no later than the 10th year after the year of death.

That was problematic for beneficiaries who inherited an IRA after the SECURE Act and who did not take any required distributions. Skipping an RMD is an expensive mistake—the penalty is up to 25% of the amount by which the RMD for a year exceeds the amount distributed in that year.

Taxpayers and financial professionals were not happy.

Relief

As a result, in that 2022 notice, the IRS offered transitional relief. Specifically, if a taxpayer did not take a specified RMD in 2021 or 2022 related to an inherited IRA, the IRS agreed not to impose an extra (excise) tax or penalty on that amount in 2022. And, taxpayers who had paid the tax for a missed (related) RMD could request a refund.

The following year, the IRS issued Notice 2023-54, which added relief by excusing missed RMDs related to an inherited IRA in 2023. The notice also announced that the final regulations would apply no earlier than the 2024 distribution calendar year.

The IRS has now issued Notice 2024-35, which—you guessed it—extends the relief through 2024 and makes clear that the final regulations will apply no earlier than the 2025 distribution calendar year. The relief applies to an RMD that would have been required if the IRA owner died in 2020, 2021, 2022, or 2023 and on or after the IRA owner’s required beginning date.

More Guidance Coming

The most recent notice also clarifies that the IRS plans to issue final regulations related to RMDs for calendar years beginning on or after January 1, 2025.

The rules related to RMDs can be complicated, especially with the SECURE Act and SECURE 2.0 Act changes. And, as noted, getting it wrong can be expensive. If you have questions, check with your tax or financial professional.

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