Introduction
Recently, the IRS issued Notice 2024-35 providing additional guidance on Required Minimum Distributions (“RMDs”) due for the 2024 and 2025 calendar years. The purpose of the new guidance was to remind taxpayers of the new 10-year rule introduced under the SECURE Act of 2019 and extend relief to those who failed to take an RMD. These rules impact both the participant and beneficiary of a defined contribution retirement plan or IRA.
Overview
The SECURE Act of 2019 (“SECURE Act”) changed the RMD payment period for certain beneficiaries. Under the old rules, almost all living people qualified as “designated beneficiaries,” meaning they could stretch RMD payments out over their life expectancy. The SECURE Act narrowed this classification to the following categories:
- The surviving spouse of the participant/IRA owner;
- Child of the participant/IRA owner who has not reached age 21;
- A disabled individual;
- Someone who is “chronically ill;” or
- An individual who is not more than 10 yrs. younger than the participant.
Any other living beneficiary that is listed on the designation form is a “designated beneficiary.” These individuals must empty the IRA or employer plan account within 10 years from the date the participant/IRA owner dies. In February of 2022, the IRS made two important updates:
- If the participant/IRA owner died while receiving RMDs, any beneficiary subject the 10-year rule must receive an annual distribution and empty the account within two years; and
- A child “eligible designated beneficiary” is subject to the 10-year rule after reaching age 21 and must take an annual distribution.
Notice 2024-35 extends previously granted relief to individuals who violate these rules if the participant/IRA owner died in 2021-2024. This relief is important because the Tax Code imposes a 50% excise tax of 50% on any missed RMD and many people misunderstood the new rules. For example, many people subject to the 10-year rule were unaware that they needed to receive an annual RMD. Instead, they mistakenly believed that they only needed to empty the account within 10 years. Similarly, many child eligible designated beneficiaries were unaware that they became subject to the 10-year rule upon reaching age 21.
Finally, Notice 2024-35 also confirms that the IRS intends to issue final regulations codifying all RMD changes that will be effective for calendar years beginning on or after January 1, 2025.
Ultimately, plan professionals should be aware of the significant changes to the RMD rules and their impact on unsuspecting beneficiaries. Thankfully, the IRS has taken a proactive approach and continually issued relief for individuals who misunderstood the changes. However, any enforcement relief will probably cease with the final regulations.