Since January 1, 2020, when SECURE 1.0 became effective, the issue of beneficiary IRAs and how they need to be handled has been a thorn in the sides of advisors and clients alike.

For background purposes, the original SECURE Act got rid of the stretch IRA, meaning that non-spouse beneficiaries (i.e., non-eligible designated beneficiaries) would no longer be able to “stretch” withdrawals from IRA accounts they inherited across their life expectancies.

The stretch IRA was replaced with the 10-year rule, which stated that those beneficiaries would be required to deplete their inherited accounts by the end of the 10^th year following the death of the original accountholder.

Then the IRS added another variable to the equation, introducing different guidelines based on whether the account owner died before or after their RMD start date. The proposed guidance, released in February 2022, outlined two scenarios for individuals who inherit IRAs:

The owner died prior to their RMD start date: Beneficiaries must fully deplete the account by December 31 of the year that contains the 10th anniversary of the RMD start date.

The owner died on or after their RMD start date: Beneficiaries must take an annual distribution in the year after death for years one through nine and fully deplete the account by December 31 in year 10.

That guidance, along with how the 10-year rule should be interpreted, caused confusion and left many advisors and clients wondering, “Did I just miss taking my RMDs?!” Fortunately, through several additional pieces of guidance, the IRS announced that beneficiaries who were subject to but did not take an annual distribution in 2021, 2022 and/or 2023 would not incur an excise tax.

RMDs for 2024

We can now add 2024 to that list. On April 16, 2024, in Notice 2024-35, the IRS noted that: “To the extent a taxpayer did not take a specified RMD (as defined in section IV.C of this notice), the IRS will not assert that an excise tax is due under IRC section 4974.”¹

In this case, a specified distribution is “any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to § 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of § 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died.”²

Future considerations

While there have been multiple delays, Notice 2024-35 does state that the final regulations regarding RMDs under IRC 401(a)(9) and related provisions are anticipated (emphasis mine) to apply for RMDs beginning January 1, 2025. Therefore, this may signal the final time the can is kicked down the road, but we will have to wait and see.

First, Notice 2024-35 does state that the final regulations regarding RMDs under IRC 401(a)(9) and related provisions are anticipated (emphasis mine) to apply for RMDs beginning January 1, 2025. This may signal the final time the can is kicked down the road, but we will have to wait and see.

The April notice also allows IRA balances to continue to grow, which could lead to a more significant tax impact once a beneficiary account owner takes an RMD. This provides advisors and clients the opportunity to discuss how this may affect their current and future tax situations. Questions to consider include: Might it make sense to spend an IRA down sooner, take the RMD anyway, or convert all or a portion of the account to a ROTH IRA?

If nothing else, the notice should prompt advisors and clients to discuss how this latest development affects their short- and long-term financial plans.

 

¹ IRS Notice 2024-35, “Certain Required Minimum Distributions for 2024.” April 16, 2024.

² Ibid.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change.  Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.