IRS Extends Relief for Required Minimum Distributions

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Required Minimum Distributions (RMDs) are essential in retirement planning, mandating that retirees withdraw and utilize savings from tax-advantaged accounts like IRAs and 401(k)s throughout retirement years. Recently, IRS Notice 2024-35 has introduced significant adjustments to these distributions, focusing on beneficiaries who manage inherited retirement accounts. The notice also announces that the final regulations regarding RMDs, set to be issued by the Treasury Department and the IRS, will take effect starting January 1, 2025. These regulations are anticipated to address public feedback on previous proposals and will further refine the changes brought about by past reforms. The upcoming rules are expected to enhance the clarity and application of RMDs, aiming to help stakeholders stay informed and better equipped to comply with legal requirements. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Background on RMD Requirements

RMDs represent the minimum annual withdrawals mandated for retirement account holders once they reach a specified age. This prevents tax-deferred savings from growing indefinitely. While historically set at 70 ½, recent legislative changes have increased the age for Required Minimum Distributions to 72. Furthermore, individuals who reach age 72 after December 31, 2022, must start their distributions at age 73.

These distributions are designed to spread retirement savings over an individual’s lifetime, ensuring that associated taxes are eventually collected. The age adjustment reflects broader efforts to modernize retirement policies, accommodating longer life expectancies and trends toward later retirement.

Overview of Notice 2024-35

Notice 2024-35 addresses specific scenarios in which penalties for failing to meet Required Minimum Distributions may be waived. The notice targets relief towards Defined Contribution (DC) plans and Individual Retirement Accounts (IRAs) that fail to make certain RMDs due to the account holder’s or designated beneficiary’s death. This applies notably to situations where the original account holder had already commenced their RMDs and passed away between 2020 and 2023.

Beneficiary Categories Affected

The relief impacts two primary groups:

  • Designated Beneficiaries: If the IRA owner or plan participant died in the specified years and had started RMDs, the beneficiaries not using the lifetime expectancy method to calculate distributions are exempt from any penalties.
  • Eligible Designated Beneficiaries: This includes those who inherited the retirement account and chose to stretch the distributions across their lifetime or life expectancy. If these beneficiaries pass away within the specified timeframe, the next in line to inherit the IRA can also benefit from these relaxed penalty rules.

This targeted and temporary relief is designed to ease the administrative and financial burdens on beneficiaries and plan administrators during a potentially challenging transition period, allowing for more effective management of inherited assets according to individual needs.

The 10-Year Rule

Introduced by the SECURE 2.0 Act, the 10-year rule requires most non-spouse beneficiaries, such as adult children and grandchildren, to withdraw the entire balance of an inherited retirement account within ten years of the original account holder’s death. Meanwhile, surviving spouses retain the preferential options established by the original SECURE Act. They may choose to be treated as beneficiaries of the IRA or assume ownership of the account themselves. Specific rules may apply depending on factors such as age and life expectancy.

The guidance also provides clarifications and temporary relief from penalties associated with this rule, offering additional time to adapt without immediate financial penalties. This is crucial, especially for those who might not have anticipated such a condensed timeline, thus preventing potential tax burdens from accelerated withdrawal requirements.

Modifications to Excise Tax Penalties

The SECURE Act and subsequent legislation, including SECURE 2.0, have significantly altered the penalties associated with RMD non-compliance:

  • Penalty Reductions: Originally, failing to take RMDs incurred a severe penalty of 50% of the amount that should have been distributed. The SECURE 2.0 Act reduced this penalty to 25% of the missed distribution amount.
  • Opportunity for Additional Reduction: If beneficiaries rectify the missed distribution by the end of the second year following the missed year, the penalty can be further reduced to 10%.

The guidance also extends a critical exemption from these penalties for the year 2024, recognizing the challenges and uncertainties faced in the transition period. This exemption is particularly vital under the 10-year rule, providing beneficiaries with flexibility regarding the timing and amounts of distributions to avoid penalties.

Contact Us

The changes and temporary relief measures outlined in Notice 2024-35 represent a significant shift in how retirement accounts are managed. These adjustments aim to simplify the process for beneficiaries and plan administrators while ensuring that the deferred tax benefits of retirement savings are not extended indefinitely. If you have questions about the information outlined above or need assistance with your next benefit plan audit, JLK Rosenberger can help. For additional information, call 818-334-8646 or click here to contact us. We look forward to speaking with you soon.