There is nothing more certain than death and taxes, and both of those overlap with the year of death required minimum distribution (RMD).

Each year after the year the IRA owner turns age 73, 74, or 75 based on birth year, the IRA owner is required to distribute a portion of his or her traditional IRA balances so that the government may collect taxes on it. The amount the government mandates be taken out of the account each year is called a Required Minimum Distribution or RMD.

The dawn of a new year also dawns that year’s new required minimum distribution. Using the value of your traditional retirement account on December 31 of the previous year, you divide by a life expectancy number provided by the IRS based on your age (most commonly called “the divisor”). In this way, anyone past their required beginning date who has an IRA balance on December 31 has a required minimum distribution for the new year.

One year, the IRA owner will die, and that year their RMD is called the “Year of Death RMD.” Because of how beneficiary designations and RMD tax requirements play off of one another, there are some odd realities for this odd distribution requirement.

Who is required to distribute any remaining Year of Death RMD?

Designated beneficiaries own the decedent’s IRA after death and share collectively the Year of Death RMD responsibility. This means that the designated beneficiaries together must ensure that from their inherited IRAs a total distribution equaling or exceeding the RMD is distributed during the year of death. This might mean that one beneficiary distributes the whole requirement or that heirs share the burden prorated across their shares.

If one heir is a charity who takes a total distribution of their share, for example, a large enough distribution would satisfy the Year of Death RMD requirement for all. On the flip side, if one heir takes their prorated share and the other distributes nothing, both are responsible for ensuring the remainder is withdrawn.

The IRS makes this especially clear in FR Doc. 2024-14542 (emphasis added):

…relating to the required minimum distribution for the calendar year of the employee’s death by providing that a required minimum distribution must be paid to “any beneficiary” in the year of death rather than to “the beneficiary.” Thus, for example, 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).

Who receives the distribution?

Each heir who receives an individual distribution and has tax liability on those distributions personally. The decedent’s estate and final tax return does not have responsibility for distributions after death or assume tax liability for it unless the estate itself is the designated beneficiary.

By when do the heirs have to distribute?

Required Minimum Distributions (RMDs) are, as their name suggests, required. If you don’t withdraw the required minimum by December 31st, then the IRS charges you a up to 25% penalty on the money you should have withdrawn. That penalty is called an “Additional Tax on Excess Accumulation” by the IRS and is reported on Part IX of IRS Form 5329.

However, thanks to the SECURE Act, heirs in the taxable year the IRA owner died have an automatic waiver of this penalty until the tax filing deadline including extensions. This waiver can be helpful in cases where the previous IRA owner died late in the year or it took a while to identify beneficiaries. If you already have control of the funds though, we recommend distributing before December 31 for the same reasons as described in “Distribute Your First 401(k) RMD in April or December?”

FR Doc. 2024-14542 explains this automatic waiver of excise tax here (emphasis added):

The proposed regulations provided for an automatic waiver of the excise tax that applies in the case of an individual who had a minimum distribution requirement in a calendar year and died in that calendar year before satisfying that minimum distribution requirement. In this situation, a beneficiary of the individual must satisfy the minimum distribution requirement by the end of that calendar year. However, if that beneficiary fails to satisfy the minimum distribution requirement in that calendar year, then the proposed regulations provided that the excise tax for that failure is automatically waived provided that the beneficiary takes the missed required minimum distribution no later than the tax filing deadline (including extensions thereof) for the taxable year of that beneficiary that begins with or within that calendar year. Consistent with requests made by commenters, 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.

What if the previous owner was aggregating their RMD?

There’s an odd rule that permits IRA owners to aggregate their traditional IRAs with other traditional IRAs and aggregate their 403(b) plans with other 403(b) plans when considering whether their distributions satisfied their RMD. So, if they need to withdraw $5,000 from one IRA and $5,000 from another IRA, they can withdraw $10,000 from just one of them or $8,000 from one and $2,000 from another.

This rule only applies to IRAs and 403(b) plans, other types of retirement plans like 401(k) plans or 457 plans are not permitted to be aggregated. Additionally, you can only aggregate like with like; if you have both an IRA and a 403(b) plan, you must distribute your RMD from each separately.

If an IRA owner was using this aggregation rule when they died, this can create some confusion if their aggregated accounts had different beneficiary designations. That is why the IRS weighed in on what the year of death RMD will be. The answer: you total the remaining RMD and then prorate the remainder between the IRAs.

FR Doc. 2024-14542 explains this proration requirement here (emphasis added):

These regulations also clarify the rules for the beneficiaries of an owner of multiple IRAs that are aggregated for purposes of satisfying the required minimum distribution rules. The new rules apply in the case of an IRA owner who dies before taking the total required minimum distribution in a calendar year (that is, there is a shortfall) if the beneficiary designations with respect to all of those IRAs are not identical. In that case, each of the owner’s IRAs is subject to a requirement to distribute a proportionate share of the shortfall to a beneficiary of that IRA. This allocation of the proportionate share of the shortfall to a particular IRA is made without regard to whether some of the required minimum distribution for the calendar year was already made to the IRA owner from that IRA. Similar rules apply in the case of a beneficiary of multiple IRAs that are aggregated for purposes of satisfying the required minimum distribution rules if a required minimum distribution is due for the calendar year of the beneficiary’s death to the extent that the amount was not distributed to the beneficiary.

This sounds good on paper, but is confusing in practice.

Let’s go back to the example of two IRAs, each with the same December 31st value and a $5,000 RMD requirement. If the decedent had only withdrawn $2,000 from one IRA, there is no way to know that they’ve aggregated, so heirs can easily default to withdrawing the remaining $3,000 RMD from this first IRA and the remaining $5,000 RMD from the other account.

If instead though the decedent had withdrawn $7,000 from the first IRA, then there would be $3,000 remaining. The IRS is suggesting that you’d take that $3,000 and prorate it across the two accounts. Based on what value? This section is not clear, but one would guess it is the prior-year end account balance or $1,500 more from the IRA which already had $7,000 distributed and $1,500 from the IRA which had none distributed. If heirs coordinate, they collectively can take less RMD. However, if they don’t share information, the first IRA owner will think the year of death RMD is fully satisfied while the second IRA owner takes a full $5,000 distribution, more than the required minimum.

In this way, this rule primarily helps heirs who inherit multiple IRAs from the same decedent.

How do I get started with a Year of Death RMD?

The first step is to calculate the decedent’s required minimum distribution for the year of death. Sometimes you can just ask the custodian. Schwab, for example, will calculate an IRA owner’s (not heir’s) required minimum distribution for the year.

However, you can also do the calculation yourself:

• First, you must acquire the prior year December 31st value for the IRA.
• Then, using the decedent’s birth year as “your birth year” in a calculator like this one, you can find their divisor for the current year.
• Then, divide the December 31st value by the divisor. This is the total IRA’s RMD requirement for the year.
• Next, acquire how much (if anything) the decedent has already withdrawn from the IRA and subtract this amount from the Year of Death RMD. The result is how much RMD remains assuming the heir was not aggregating IRAs.
• The last step is to coordinate with the other heirs to ensure each of you will distribute your own share. The default would be to divide the RMD by your share of the IRA. For example, if you inherited one third of the IRA, you would divide the RMD by 3 to calculate your default share, leaving the remaining two thirds for other heirs to distribute.

Inherited IRAs take coordination between the custodian and the other heirs. We assist with this type of coordination through our Estate Management & Inheritance Assistance service, included for heirs of our Comprehensive service level clients.

Photo by Vadim Pospelov on Unsplash. Image has been cropped.