One advantage of having a Roth IRA is that the owner has no RMDs. For this reason, a Roth IRA owner is always considered to have died before his RBD – regardless of how old the owner was at death. The rules become more complicated for 401(k)s and other employer-sponsored retirement savings plans. Under the exception of those still working, most plans allow participants who continue working beyond age 72 to delay their RBD until April 1 after they retire. This excludes SEP and SIMPLE IRAs, and this delay is also not available to those who own more than 5% of the company sponsoring the plan. The regulations clearly state that if someone owns more than 5% of the company is determined in the plan year ending in the calendar year that the employee turns 72 (or age 70 ½ for those born before July 1, 1949). The RBD and Annual RMDs During the Ten-Year Period For deaths before 2020, pre-SECURE Act rules allowed designated beneficiaries to bridge RMDs throughout their life expectancy. However, if the account owner died before their RBD, the IRA or plan could allow (and sometimes require) the entire account to be paid under the five-year rule. The rule required the account to be emptied by December 31 of the fifth year following the year of death. There were no annual RMDs within the five years – the beneficiary had total flexibility to take as much or as little from the account annually. The only requirement was to empty the account at the end of the five years. The five-year rule was not an option when the death occurred on or before the RBD. After the SECURE Act was enacted, most commentators believed it blurred the distinction between death before and after the RBD for post-death RMDs. The law seemed to say that most non-spouse beneficiaries were required to empty the inherited account within ten years after death, but like the five-year rule, no annual RMDs were required during the ten-year period. It is important to note that the life expectancy stretch is still available for particular designated beneficiaries known as “eligible designated beneficiaries (EDBs):” surviving spouses, children of the account holder under age 21, chronically ill or disabled individuals, or anyone not more than ten years younger than the account holder.
The IRS interprets the SECURE Act differently. The IRS takes the position that the SECURE Act did not do away with an old RMD rule that is sometimes called the “at least as rapidly” rule. The rule does not require a beneficiary to continue receiving the same amount the IRA owner was receiving, but it requires that distributions continue after the owner’s death. Therefore, if an IRA owner was receiving annual RMDs, annual RMDs must continue after death, just not at the same amount. The result is that two rules apply at the same time when the IRA owner dies on or after the RBD with a beneficiary who is a non-eligible designated beneficiary: The “at least as rapidly” rule requires RMDs to continue in years 1 – 9 after death; The ten-year rule requires all funds in the inherited IRA to be withdrawn by the end of the tenth year after death. Other Reasons Why the RBD is Now Important The new rule requiring certain non-eligible designated beneficiaries to take annual RMDs during the ten-year period has been well-publicized. What has not received as much attention is that, under regulations, whether death occurred before or after the RBD is a controlling factor in several other RMD situations. For example, the death-before-or-after-the-RBD rule often tells us if the annual RMD requirement extends to successor IRA beneficiaries (e.g., the beneficiary of the first beneficiary). A successor beneficiary who inherits after 2019 is always subject to the ten-year rule. Suppose the original IRA owner died on or after his RBD; the first beneficiary was a non-eligible designated beneficiary. In that case, the successor must continue the annual RMDs during the remaining ten-year period. These annual RMDs would be calculated over the first beneficiary’s life expectancy. Annual RMDs would not apply if the original owner died before the RBD. Similarly, if the original owner died on or after his RBD and the first beneficiary was an EDB, the successor must take annual RMDs over the successor’s ten-year period. The regulations suggest that annual RMDs are also required over the ten-year period, even if the original owner died before the RBD. This requirement could be because annual RMDs had already started when the EDB was required to take them and, therefore, must continue.
ESTATE PLANNING | FINANCIAL LITERACY
Inherited IRAs: Why the Required Beginning Date is More Important Now than Ever Before
Brian Short CFP ® Senior Wealth Advisor
When the SECURE Act became effective in 2022, the question of whether a retirement account owner died before or after the required beginning date did not seem as vital as it was. That changed when the IRS published the new SECURE Act regulations on February 23, 2022. Understanding the required beginning date and how it is a central concept for determining required minimum distributions (RMDs) post- death is essential.
What is the Required Beginning Date? Simply put, the required beginning date (RBD) is the first date RMDs from IRAs and other retirement savings plans must begin. Before the SECURE Act, the RBD for traditional IRA owners was April 1 of the year, following the owner turning 70 ½. The SECURE Act extended the RBD for traditional IRA owners born on or after July 1, 1949, to April 1 of the year after the owner turns age 72. The SECURE Act 2.0 further changed the RBD date to age 73, up to a maximum age of 75 for those born in 1959 or after.
10 PERSPECTIVE Summer 2023
PERSPECTIVE Summer 2023 11
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