Updated Guidelines Released on Required Minimum Distributions

2024-10-08

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The Internal Revenue Service (IRS) and the Department of Treasury recently released updated guidelines on Required Minimum Distributions (RMDs) from Individual Retirement Accounts (IRAs). These final regulations, effective July 18, 2024, largely align with the proposed rules outlined in the SECURE and SECURE 2.0 Act. However, they also address several key questions and concerns around the 10-year rule and eligible ages for RMDs. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the basic updates and determinations that employees and beneficiaries should know.

RMD Determination and Plan Years

RMD determination should abide by SECURE Act amendments for plans on or after January 1, 2025, and SECURE 2.0 Act amendments for the 2023 and 2024 distribution years.

Required Beginning Date

The required beginning date (RBD) for distributions will be on April 1 of the year after an employee reaches the applicable age or after they retire. Applicable ages vary based on birthdate:

• Born before July 1, 1949: 70-1/2
• Born on or after July 1, 1949, and before January 1, 1951: 72
• Born on or after January 1, 1951, and before January 1, 1959: 73
• Born on or after January 1, 1960: 75

The updated guidelines solve a question about applicable ages for employees born in 1959. Plans can be distributed based on a uniform RBD on calendar years after employees turn 70-1/2 to make it easier from an administrative standpoint.

Distributions Before the RBD to Beneficiaries

For employees who die before their RBD, designated beneficiaries, such as spouses or children, must continue taking distributions from the retirement account. However, beneficiaries don’t have to take required minimum distributions (RMDs) if the entire retirement account is Roth. In this case, the employee is considered to have died before the RBD. Until the account is completely distributed, annual distributions must align with the final regulations. Plans can also specify how beneficiaries take distributions. For example, a spouse may be required to choose between life expectancy payments or abide by the ten-year rule.

Eligible Designated Beneficiaries

These beneficiaries are defined as designated beneficiaries who meet one of these requirements:

• Surviving spouse
• Minor child
• Disabled
• Chronically ill
• Ten or fewer years younger than the employee

A beneficiary is generally defined as having a disability if unable to participate in significant gainful activity. If they are a minor child, they must have a medical condition that substantially impacts activities and is either expected to last a long time or result in death.

If the Social Security Commissioner determines that the beneficiary is disabled, this serves as a “safe harbor” to these recipients. Documentation must be sent to the retirement plan administrator no later than October 31 of the year after the employee dies, which may include certifications from healthcare professionals but requires some proof of eligibility.

Purchasing an Annuity

If employees want to use part of their retirement account to buy an annuity, they can either apply the general bifurcation rule or the alternative method to the purchase. The general bifurcation rule requires that employees take an RMD for the year, but it can be reduced by the amount spent on the annuity. The alternative method involves adding the fair market value of the annuity to the remaining account balance, treating payments like account distributions. The fair market value will be determined on December 31 of the year before the RMD is taken.

Distributions after Death

The 2022 proposal for continued annual distributions on or after an employee’s RBD has been upheld in the final regulations. If an individual has started taking RMDs, annual distributions generally must continue, and full distribution must be made by the 10th anniversary of the employee’s death.

While some hoped that annual distributions could be ceased temporarily as long as the full distributions were made within a 10-year period, this final ruling requires ongoing annual distributions. This may increase administrative burdens for recipients.

Surviving Spouses

Aligned with the SECURE 2.0 Act, surviving spouses as sole beneficiaries may be treated like employees for RMD purposes. If the employee dies before taking RMDs, the beneficiary may use their life expectancy to calculate RMDs. If the employee dies after RMDs have started, the election is not automatic; instead, the retirement plan needs to have specific rules in place to make the election automatic.

Multiple Minor Beneficiaries

If more than one minor is listed as an eligible designated beneficiary, the full distribution is required at ten years after the youngest child reaches the age of majority or dies, whichever happens earlier.

Designated Roth Accounts

As mentioned briefly, accounts held in designated Roth accounts are disregarded when calculating the balance subject to RMD rules. This also means that distributions do not count toward satisfying RMDs. Roth accounts can be rolled over into Roth IRAs.

Missing an RMD

For employees that miss an RMD, there may be a penalty tax; however, there is an automatic waiver of the tax if employees or beneficiaries take it by the end of the following year. Missed RMDs still mean that employees must take the regular RMD for the year.

Contact Us

The final regulations provide important guidance that plan participants, beneficiaries, and sponsors need to review carefully. Depending on your situation, taking RMDs may be a complicated proposition. 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 949-860-9902 or click here to contact us. We look forward to speaking with you soon.