• The Excise Tax Waiver Has Expired for 10-Year IRA Beneficiaries with Annual RMDs

    By: Denise Appleby, MJ, CISP, CRC, CRPS, CRSP, APA

    Beneficiaries subject to SECURE Act’s 10-year rule and required to take annual RMDs were granted an automatic waiver of the excise tax that would otherwise apply if they failed to take required minimum distributions (RMDs). These automatic waivers applied to 2021, 2022, and 2023. But, failing further extension by the IRS, these beneficiaries must take RMDs for 2024 to avoid the 25% excise tax.

    Who qualified for this automatic excise tax waiver?

    This automatic waiver applies only to beneficiaries who meet the following two requirements:

    1. They are subject to the 10-year rule, under which their inherited IRA must be fully distributed no later than the 10th year after they inherited the IRA. And
    2. They are required to take annual RMDs.

    These beneficiaries are:

    A. Any designated beneficiary who inherited a traditional, SEP, or SIMPLE IRA, where the IRA owner died on or after their required beginning date (RBD).

    • The RBD is the date an account owner must take their first RMD.
    • Roth IRAs are not included because Roth IRA owners do not have RMDs.

    Example 1

    50-year-old Tom inherited his 75-year-old father’s traditional IRA in 2020. Tom is more than ten years younger than his father, not disabled or chronically ill, and, therefore, not an eligible designated beneficiary. Since Tom is a plain designated beneficiary, he is subject to the 10-year rule and, therefore, must ensure that the inherited IRA is fully distributed by the end of 2030. In addition, because Tom’s father died after his RBD, Tom must take annual RMDs over his life expectancy beginning in 2021.

    While the excise tax applies to an RMD that is not taken for a year, it is automatically waived for Tom for 2021, 2022, and 2023.

    B. A successor beneficiary, where the primary beneficiary was taking life expectancy distributions.

    This provision applies to traditional, SEP, SIMPLE, and Roth IRAs.

    Example 2

    75-year-old Sally inherited a traditional IRA from her 77-year-old sister Carla in 2020. Sally is an eligible designated beneficiary because she is ‘not more than ten years younger’ than Carla.

    Sally must take annual distributions over her life expectancy, beginning in 2021. The 10-year rule does not apply to Sally because she is an eligible designated beneficiary.

    The automatic waiver does not apply to Sally because she is not subject to the 10-year rule.

    Sally died in 2022, and her IRA was inherited by her son, Tim.

    Tim, the successor beneficiary of Carla’s IRA, must continue taking distributions over Sally’s life expectancy beginning in 2023. Tim must also ensure that the IRA is fully distributed no later than 2032, which is the 10th year after Sally’s death.

    While the excise tax applies to an RMD that is not taken for a year, it is automatically waived for 2023 for Tim.

    While other beneficiaries could qualify for waivers under other circumstances, these are the only two types that qualify for the automatic waiver discussed in this article.

    Are ‘catch-up RMDs’ required?

    A catch-up distribution is optional for those qualifying beneficiaries who did not take their RMDs for any or all three years (2021, 2022, and 2023). However, they must still meet the 10-year deadline. For instance, in the case of Tom in Example 1, he must still ensure that his inherited IRA is fully distributed by the end of 2030 despite the waiver of the excise tax.

    No special tax forms or tax reporting required

    Generally, IRS Form 5329 must be filed for an RMD not taken by the deadline, and any excise tax included as ‘additional taxes’ on the individual’s tax return. But an exception applies where there is an automatic waiver. Resultantly, beneficiaries who qualified for the automatic waiver discussed herein need not file IRS Form 5329 for any RMDs not taken for those years.

    Should these beneficiaries wait and see for 2024?

    One of the common questions about this automatic waiver is whether it will be extended for 2024. There is yet to be an indication from the IRS that it will. There is still time for those who prefer to wait, as the deadline for taking the 2024 RMDs is December 31, 2024.

    The IRS’s first notification of the excise tax waiver was published in July of 2022, explaining the excise tax was waived for 2021 and 2022.

    The second notice, extending the waiver to 2023, was issued in July 2023. It would be reasonable to assume that any notification of an extension of the waiver could be issued later in the year.

    To take or not to take a 2024 RMD

    Beneficiaries should consider the impact of not taking RMDs for 2024, even if the excise tax is waived. Not taking an RMD for 2024 means bunching up the distributions over a period that is one year shorter, causing larger RMD amounts for the remainder of the ten years. However, a waiver might be a welcome solution for a beneficiary who needs to shift the income from 2024 to a later year for tax and other financial planning reasons.

    The consequences of missing the 2024 deadline

    Failing any further extension of the automatic waiver provision, a beneficiary who misses the deadline for taking their 2024 RMD will owe the IRS an excise tax of 25%. This excise tax is reduced to 10% if the shortfall is corrected in a timely manner.

    If a taxpayer misses the RMD deadline due to reasonable error, their tax preparer may request a waiver of the excise tax when filing IRS Form 5329.

    Reminder: RMD rules, including the ones discussed in this article, also apply to employer plans. However, plan administrators administer RMDs. Employees and beneficiaries with assets under employer plans should contact the plan administrator for assistance with their RMDs.

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