The IRS has extended the waiver of excise tax on RMDs for 10-year beneficiaries—yet again!
The waiver was first granted for 2021 and 2022—for designated and certain successor beneficiaries who inherited IRAs after 2019—and later extended to 2023. Now, Notice 2024-35 extends it to 2024.
This latest extension brings renewed questions from beneficiaries and their advisors. In this issue, we answer some of the most common questions.
Background
SECURE Act 1.0 repealed the option for a designated beneficiary to take distributions over their full life expectancy and replaced it with a maximum period of 10 years. This 10-year maximum also applies to successor beneficiaries who inherit accounts from primary beneficiaries who were taking distributions over their full life expectancy. Under this 10-year rule, an IRA or employer plan account inherited after 2019 must be fully distributed by the 10th year following the year the account owner died.
The explanation of this 10-year rule, as provided under SECURE Act 1.0, is that it is identical to the five-year rule that applied before the SECURE Act era. Recall that under the five-year rule, distributions are optional for the first four years after the account owner’s death, and the account must be fully distributed no later than the fifth year. Consequently, interested parties reasonably interpreted that to mean that under the 10-year rule, distributions were optional for the first nine years, and the account must be fully distributed no later than the 10th year.
While this interpretation is correct in instances where the account owner died before their required beginning date (RBD), the IRS explained in their proposed RMD regulations, published on February 24, 2022, that the “at least as rapidly” rule applies (ALAR) to a beneficiary who inherits a retirement account from someone who was already taking required minimum distributions.
The ALAR Rule: A Sidenote
Under the ALAR Rule, a beneficiary who inherits a retirement account from someone who had already started taking their RMDs must continue taking annual RMDs beginning the year after the account owner’s death. However, while the account owner would have been taking distributions under the Uniform Lifetime Table (or the Joint and Last Survivor Table if the spouse is the sole primary beneficiary and more than 10 years younger) the beneficiary would use the Single Life Table to calculate distributions from their inherited account.
This explanation means that a designated beneficiary who inherits an IRA or employer plan account from someone who died after the RBD must take annual RMDs during their 10-year period.
This annual RMD requirement also applies to a successor beneficiary who inherits a retirement account from a primary beneficiary who was taking distributions over their full life expectancy.
In response to their explanation, the IRS received a lot of complaints because it then meant that some beneficiaries who inherited IRAs in 2020 didn’t take their 2021 RMDs because they thought they didn’t have to, and now they owe the IRS a 50% excise tax on that RMD shortfall. In response, the IRS issued Notice 2022-53, under which they announced that beneficiaries subject to the 10-year rule and required to take annual RMDs would not be subject to the excise tax that would otherwise have applied for 2021 and 2022.
The IRS later issued notice 2023-54 extending the waiver to 2023. And finally, notice 2024-35 extends it to 2024.
Note: The excise tax on RMD shortfalls had been reduced to 25% after 2022, and further reduced to 10% if corrected within a new correction window.
Answers to common questions
The following are the answers to some of the most common questions that have resurfaced as a result of this latest extension of the waiver of the excise tax:
Response: No. But you do not need it since you have no annual RMDs. Because your brother died before his required beginning date (RBD) and was therefore not taking RMDs, your distributions are optional until 2030 when you must withdraw any remaining balance. Optional distributions cannot be subject to an excise tax, making any waivers inapplicable.
- I inherited an IRA from my sister in 2022. She was already taking RMDs when she died. Do I qualify for the waiver?
Response: It depends. You qualify for the waiver only if you are a designated beneficiary who is not an eligible designated beneficiary. You are an eligible designated beneficiary if you are either of the following:
- Disabled at the time of your sister’s death
- Chronically ill at the time of your sister’s death, or
- Not more than 10 years younger than your sister. This includes if you are older than your sister.
If you fall under either of these classes, you are eligible to distribute the inherited IRA over your full life expectancy—which means you are not subject to the 10-year rule. You only qualify for this automatic waiver if subject to the 10-year rule.
If you do not fall under these classes, you are a designated beneficiary and qualify for the waiver.
Please note: If you failed to take your RMD and you do not qualify for this automatic waiver, your tax preparer may request a waiver of the excise tax if that deadline was missed due to reasonable error. IRS Form 5329 is used to request such waivers.
P.S.: A spouse and a minor child of the IRA owner would also be classified as eligible designated beneficiaries. They too, are not eligible for the waiver.
- My cousin inherited a Roth IRA from his sister in 2015. He was taking distributions from his beneficiary Roth IRA over his life expectancy. He died in 2022, and I inherited his beneficiary Roth IRA. Do I qualify for the waiver?
Answer: Yes. Because your cousin was taking distributions over his full life expectancy and died after 2019, you are subject to the 10-year rule. In addition, you must continue taking distributions over his life expectancy. You qualify for the waiver since you are subject to the 10-year rule and must take annual RMDs.
- I inherited an IRA from a friend who was taking RMDs when he died in 2023. I am 15 years younger than he is, not disabled, and not chronically ill. I know this means that I am a designated beneficiary (who is not an eligible designated beneficiary) and therefore qualify for the waiver.
However, I already took my RMD for 2024. Can I roll it over to my beneficiary IRA?
Answer: No. Because your distribution is from a beneficiary account and you are not a “spouse beneficiary,” it cannot be rolled over.
- I inherited my IRA in 2020 and took advantage of the waiver from 2021–2024. When I start taking my RMDs in 2025, will I have to add my RMDs for 2021–2024 to the amount I withdraw in 2025?
Answer: No. There is no “catch-up” requirement. You may choose whether (or not) to withdraw more than your 2025 RMD in 2025.
- I inherited an IRA in 2023 and qualify for the waiver. If I do not take RMDs for 2024, does that mean I get an extra year to distribute my inherited IRA?
Answer: No. You must still ensure your inherited IRA is fully distributed by the end of 2033.
- I qualify for the automatic waiver under this provision. Will I need to file IRS Form 5329 to ensure I get the waiver?
Answer: No. Because the waiver is automatic, you do not need to submit a request for it.
- I inherited an IRA in 2021 and paid the 50% excise tax before I knew that I qualified for the automatic waiver. Am I entitled to a refund?
Answer: Yes. Talk to your tax advisor about requesting a refund.
- Why won’t the IRS waive RMDs for these 10-year beneficiaries?
Response: Because they do not have the authority to do so. The IRS is working within its limitations.
Congress has the authority to waive RMDs—Not the IRS
While the waiver of the excise tax is a welcome relief for some, many interested parties want more in the form of RMD waivers. An RMD waiver would likely extend the 10 years and allow beneficiaries to repay amounts that they withdraw to cover RMDs. Such was the case when RMDs were waived for 2020 under the CARES Act of 2020, where 2020 is not counted for the five-year rule—thus making it six years for those who inherited retirement accounts from 2017–2019; and beneficiaries were allowed to return the “non-RMD” amounts to their beneficiary IRAs.
The IRS has done the most they have the authority to by waiving the excise tax. Since Congress can waive RMDs, taxpayers who want RMDs to be waived may consider contacting their congressperson and request that they work on a bill to have RMDs waived.