On April 16, 2024, the Internal Revenue Services (IRS) released Notice 2024-35, granting relief for failure to make requirement minimum distributions (RMD) from a deceased individual’s Qualified Retirement Plan (QRP) accounts and inherited Individual Retirement Accounts (IRAs).
How Beneficiaries Can Manage Retirement Account Distributions
Most Americans own some kind of qualified retirement account (e.g., IRA, 401(k), 403(b) annuity) and leave the remaining balance in those accounts to their beneficiaries at their death. Several changes were made to the rules regarding distributions from these types of accounts in the Setting Every Community Up for Retirement Enhancement (SECURE) Act signed into law December 2019. Further changes were made within SECURE Act 2.0 in December 2022.
There has been a significant amount of confusion around when the beneficiary of an inherited QRP account is required to begin taking distributions after the death of the account owner. When the beneficiary of an inherited QRP fails to take the required minimum distribution from the account in any tax year, a penalty equal to 25% of the undistributed amount is assessed. This penalty can be reduced to 10% if corrected within two years. Confusing guidance and looming penalties are not a great combination.
Notice 2024-35 gives taxpayers some breathing room and clarification on how to correctly apply these new rules. Section IV of Notice 2024-35 indicates that certain beneficiaries of an inherited QRP will not be subject to penalties for failure to take RMDs in 2024. Final regulations will be issued regarding the RMD changes for 2024 and are anticipated to be effective on or after January 1, 2025.
Beneficiaries of inherited qualified retirement plans should understand:
- When RMDs begin
- How much must be withdrawn each year
- How long they have to withdraw all the funds from the qualified retirement plan, IRA or 403(b) annuity
Taxpayers and the IRS differ with respect to when distributions to beneficiaries need to begin for decedents dying after 2019. The IRS has issued proposed regulations which require annual distributions for these individuals. Many taxpayers and advisors interpret the law to require that amounts do not need to be distributed 10 years after death. Because the regulations are not yet finalized, the interpretation of those rules requiring annual distributions is not effective. Notice 2024-35 provides relief from 2024 distributions, similar to the relief provided in earlier years. Without final regulations, we do not know what the rule will be, or how distributions that were not taken in earlier years because of the relief granted by the notices will be made up.
Notice 2024-35 specifically adds clarity to non-spousal beneficiaries who are not:
- A child younger than the age of majority
- A disabled individual
- A chronically ill individual
- An individual not previously described who is not more than 10 years younger than the account owner
Example
A benefactor passes away on April 1, 2024, and names a beneficiary for their IRA. Proposed regulations require that the minimum amount that must be distributed to the beneficiary each year will be calculated based on their life expectancy with the full balance of the IRA distributed by December 31, 2034. Notice 2024-35 provides relief from a 2024 distribution, similar to the relief provided in earlier years.
Your Guide Forward
Cherry Bekaert will continue to monitor developments and share updates related to guidance on the changes made to retirement plan rules. If you have further questions, please reach out to your Cherry Bekaert tax advisor.
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