By Andy Ives, CFP®, AIF®
IRA Analyst
When a person reaches the required beginning date (RBD) – generally April 1 of the year after the year the person turns age 73 – required minimum distributions (RMDs) must officially start on traditional IRAs. But what if an IRA owner dies in a year when the RMD is due, but before the full RMD has been paid out?
Ultimately, it is the responsibility of the beneficiary to take whatever remains of the unpaid year-of-death RMD. If there is more than one beneficiary, the 2024 final regulations, released on July 18,2024, confirm what we have long understood the rule to be: When an IRA has multiple beneficiaries, and if there is a shortfall of the year-of-death RMD, then any of the beneficiaries can take what remains of this final distribution. The year-of-death RMD is not paid to the estate unless the estate was the named beneficiary. From the summary of the final regulations:
“If an employee who is required to take a distribution in a calendar year dies before taking that distribution and has named more than one designated beneficiary, then any of those beneficiaries can satisfy the employee’s requirement to take a distribution in that calendar year (as opposed to each of the beneficiaries being required to take a proportional share of the unpaid amount).”
This rule can be helpful in many situations. For example, if a charity is named as a partial beneficiary, cashing out the charity’s percentage could cover what remains of the year-of-death RMD. The same holds true if, for example, one of the beneficiaries needs cash now. That lone beneficiary’s payout could potentially satisfy the balance of the year-of-death RMD, allowing the other beneficiaries to avoid an immediate distribution.
Historically, the deadline for taking the year-of-death RMD was December 31 of the year OF death. When death occurred late in the year, this tight deadline was often missed, adding unnecessary stress on beneficiaries. Missing a year-of-death RMD could result in the same penalty as missing any other RMD – 25% of whatever amount was not taken (reduced to 10% if the missed RMD is timely corrected).
In the IRS’s final regulations, the deadline to take the year-of-death RMD (and thereby avoid any penalty) is officially extended: “The final regulations extend the deadline for the beneficiary to take the missed required minimum distribution and be eligible for the automatic waiver. The new deadline is the later of the tax filing deadline for the taxable year of the beneficiary that begins with or within the calendar year in which the individual died and the end of the following calendar year.”
For most beneficiaries, this means the year-of-death deadline in now December 31 of the year AFTER the year of death.
Example: Grampa Joe, age 80, has a traditional IRA with his granddaughter Grace, age 22, as beneficiary. Grampa Joe’s annual RMD is normally paid on December 15. However, he dies on December 10, 2024. Granddaughter Grace is responsible for taking the 2024 year-of-death RMD, but in her grief and confusion, she fails to take it. Grace is eligible for an automatic waiver of the 25% missed RMD penalty if she takes the 2024 year-of-death RMD by December 31, 2025.