Who Does and Doesn’t Get to Skip RMDs Under the New 10-Year Rule

The Secure Act of 2019 radically changed the Internal Revenue Code’s rules for required minimum distributions from inherited retirement accounts. Most beneficiaries would henceforth have to withdraw money from an inherited account within 10 years after the owner’s death, rather than (as previously allowed) in annual installments over the beneficiary’s life expectancy. After the Secure Act, only a few categories of “eligible designated beneficiaries” would still be allowed to use the life expectancy payout method.

As surprising as it was, the new “10-year rule” seemed to have one consolation for beneficiaries: There would be no annual RMDs. Rather, it was believed, beneficiaries could withdraw as much or as little as they wanted out of their inherited retirement accounts in the first nine years after the owner’s death, as long as they took 100% of whatever was left in the account in the 10th year.

But a second shock was delivered to beneficiaries in February 2022 when the IRS issued proposed regulations interpreting the new RMD rules: Annual distributions are required in years one through nine, even under the 10-year rule, if the decedent died after his “required beginning date.”

Since the proposed regulations came out more than two years after Secure’s effective date, it was a little late for beneficiaries to hear that news. Plan administrators were equally upset since they had not been aware of this requirement.

The Secure Act inserted two other new 10-year limits into the tax code:

• While certain designated beneficiaries, called eligible designated beneficiaries, or EDBs, would still be entitled to the life expectancy payout, the continuation of that payout to the EDB’s successor beneficiary (if the EDB died before full distribution of the account) was capped at 10 years. EDBs are the participant’s surviving spouse or minor child, a disabled or chronically ill beneficiary, or any individual not more than 10 years younger than the participant.
• Finally, while the designated beneficiary of a pre-2020 decedent could continue to use his life expectancy payout as long as he lived, the continuation of that life expectancy payout to the successor beneficiary of such a “grandfathered” designated beneficiary (if the designated beneficiary died after 2019 and before his life expectancy ran out) was capped at 10 years.

With less justification, many practitioners assumed these 10-year limits were similar to the 10-year rule itself and in effect constituted a “flip” for the successor beneficiary, away from the life expectancy payout that had been underway to the now-deceased EDB (or “grandfathered” designated beneficiary of a pre-2020 decedent) over to a new 10-year payout with no payments required in years 1-9. The proposed regulations sensibly provide that there is no such flip: The 10-year period in these cases is simply an outer limit on the number of years a “life expectancy payout” can continue after the death of the original EDB or grandfathered designated beneficiary.

Notice 2022-53 Grants Relief: Excise Tax Waived for Specified RMDs

Since the proposed regulations took everyone by surprise, and since they came out too late to be implemented in a closed year (2021) or already-in-progress year (2022), the IRS correctly concluded that it had to do something by way of a delayed effective date for these “surprise” new rules. Whether all beneficiaries and plan administrators deserved it or not, the IRS granted them relief in a unique way in October 2022 with Notice 2022-53.

In the notice, the IRS does not “waive” the 2021-22 RMDs, nor has the IRS changed its mind about how the various 10-year rules work. However, the IRS will not treat the applicable retirement plan as failing to comply with the minimum distribution rules if it failed/fails to make the specified RMDs; this relieves plan administrators. And for beneficiaries, the notice waives the 50% excise tax for missed specified RMDs for 2021 and 2022.

The effect for these clients is that they can simply skip RMDs for 2021 and 2022, with no later catch-up distribution required and no need to file Form 5329 or worry about the 50% excise tax. Notice 2022-53 provides that anyone who has already filed Form 5329 and paid the excise tax for missing the 2021 RMD can apply for a refund if the missed RMD was one of the specified RMDs. However, people who actually took the RMD cannot roll it back into the retirement plan now; RMDs are not eligible rollover distributions

The specified RMDs are the 2021 and 2022 RMDs of the following beneficiaries:

• The designated beneficiary of an employee or IRA owner who died (after his required beginning date) in 2020 or 2021, provided such beneficiary is not an eligible designated beneficiary.
• The successor beneficiary of an eligible designated beneficiary who (1) died in 2020 or 2021 and (2) was taking life expectancy payments.
• The successor beneficiary of a designated beneficiary of a decedent who died before 2020, if such successor beneficiary was taking life expectancy payments.

Notice 2022-53 gives a free pass to these beneficiaries with respect to both the 2021 and 2022 specified RMDs. These beneficiaries do not have to file Form 5329 to request a waiver of the excise tax for missing the RMDs; the IRS is just not going to impose the excise tax. They do not have to take catch-up distributions; the missed RMDs are not added to next year’s RMD for excise tax purposes. These beneficiaries can just forget about 2021 and 2022 and start taking their RMDs in 2023. Of course, the RMDs they did not take will still be in the inherited account, which will increase their RMDs for future years, but that is a small price to pay for this welcome relief and happy ending.

Who Does Not Get to Skip RMDs Under Notice 2022-53

Despite the notice, the RMDs for 2021 and 2022 are still RMDs. The IRS did not erase the specified RMDs, it just said that it will not enforce the 50% excise tax on people who didn’t take them. The fact that the distribution is still technically an RMD has certain implications. Also of course, the notice does not apply to all beneficiaries, just a limited subset of beneficiaries. Here are the people and situations where the notice will not solve the problem:

• If the beneficiary of the inherited account is a trust, and the trust instrument states that the trustee “shall withdraw the required minimum distribution” each year (a common trust provision), the trustee presumably still must withdraw the RMDs for 2021 and 2022 because they are still RMDs (based on the proposed regulations and the notice). The trustee must comply with the trust instrument even if the IRS doesn’t care about the RMD.
• If the inherited benefit is in a qualified retirement plan (such as a 401(k) plan), the designated beneficiary will probably want to roll the benefit (via direct rollover) into an inherited IRA. Since RMDs are not eligible rollover distributions, and the first money that comes out of a plan in any year is applied to the RMD, the rollover cannot happen until those 2021-22 RMDs have been distributed.
• The notice provides no relief to any eligible designated beneficiaries. Since they are using the life expectancy payout and must take annual distributions—and always knew they had to take annual distributions—they were not “surprised” by the proposed regulations, so they do not get to skip 2021 and 2022.

An Example of Notice 2022-53 Relief

This targeted relief should be very welcome and beneficial to the three narrow classes of beneficiaries and successor beneficiaries affected by Notice 2022-53. Unfortunately, like everything connected with the RMD rules, the notice’s precise provisions can be confusing. The following example shows that even something as simple as skipping an RMD can be complicated.

Here’s an example: Joe died in 2020, leaving his IRA to his adult daughter Diana, the designated beneficiary. Joe’s date of birth was Aug. 1, 1944, so he died in his age-76 year, after his required beginning date for the IRA. Being neither a minor child, nor disabled, nor chronically ill, nor Joe’s spouse, and being more than 10 years younger than Joe, Diana is not an EDB; she is a plain-old designated beneficiary. Therefore, according to the proposed regulations, she was required to take annual RMDs starting in 2021, the year after Joe’s death. (Normally she would also be required to take the RMD for the year of Joe’s death, if he had not taken it himself before he died, but in 2020 there were no RMDs; they were waived for 2020 by the Cares Act, the coronavirus relief bill.

Diana’s post-2020 RMDs are calculated using Diana’s life expectancy (from the IRS’ single life table) based on her age in the year after the year of Joe’s death. Diana’s date of birth was March 29, 1972, so she turned age 49 in 2021. Under the IRS’ life expectancy table in effect in 2021, her life expectancy at age 49 was 35.1 years, so her RMD for 2021 was the Dec. 31, 2020, account balance of Joe’s IRA divided by 35.1. But she can ignore that now: She didn’t take a distribution in 2021, and now she doesn’t have to take it.

For the next year, 2022, her life expectancy for purposes of determining the RMD would normally be just the 2021 life expectancy (35.1) minus one year, or 34.1. But in 2022, new IRS life expectancy tables came into effect. Due to the switch of life expectancy tables, her life expectancy for 2022 is based on what would have been her life expectancy in 2021 (the year after the year Joe died) under the new tables, minus one year. Under the new IRS tables, her life expectancy at age 49 in 2021 would have been 37.1 years. So, her RMD for 2022 is the Dec. 31, 2021, account balance of Joe’s IRA divided by 36.1—the new 37.1-year life expectancy minus one year. But she can ignore that, too. She does not have to take any distribution in 2022.

She gets a nice fresh start in 2023. In that year, her adjusted life expectancy will be 35.1 years (37.1 minus two years). Her 2023 RMD will be the Dec. 31, 2022, account balance divided by 35.1.

Note to Diana: You do not have to take any catch-up distributions for the missed years of 2021 and 2022. In computing the 2023 RMD, you do not have to adjust the Dec. 31, 2022, account balance up or down because of whatever happened or didn’t happen in 2021-22. You do not have to file any special forms, make any particular notes on your tax return, or make any elections. Just start taking RMDs over your remaining life expectancy for the years 2023-29. Of course, if you want to take out more in any of those years you can. In 2030, the year that contains the 10th anniversary of Joe’s death, you must withdraw 100% of the balance of the inherited IRA.