RMD In Year Of Death: What You Need To Know

Understanding required minimum distributions (RMDs) is a big part of managing your retirement savings. These mandatory withdrawals start when you turn 73, allowing the IRS to collect taxes on the funds you’ve saved. However, when the account owner passes away, handling these distributions can get complicated, and it’s important to know how to address it.

This post will help simplify the process of handling required minimum distributions (RMDs) after an account owner passes away. We’ll explain what RMDs are, the rules for taking them in the year of death, and what steps beneficiaries need to take. 

What Is an RMD and Why Is It Important?

A required minimum distribution (RMD) is the smallest amount you must begin withdrawing from certain retirement accounts, such as traditional IRAs or 401(k)s, once you reach age 73. The required beginning date (RBD) marks the latest point by which you must initiate these withdrawals. RMDs are mandated by the IRS so taxes can be collected on savings that have grown tax-deferred. The amount you withdraw counts as taxable income, which is why the IRS has rules on when RMDs must be taken. 

The reason behind RMDs is to prevent individuals from avoiding taxes on their retirement accounts indefinitely. The first RMD must be taken no later than April 1st of the year after you reach 73. If you decide to delay that first withdrawal to the following year, you’ll need to take two in the same year. Afterward, RMDs must be completed by December 31st each year to avoid penalties.¹

Is an RMD Required In the Year of Death?

If the account owner passes away without taking their RMD for the year, it still needs to be withdrawn. The obligation to take this distribution shifts to the designated beneficiaries. The RMD must be taken by December 31st of the year in which the account holder dies to avoid any issues or penalties.²

The timeline and process for taking the RMD vary depending on the type of beneficiary, whether they are a spouse or non-spouse. Other beneficiaries, such as trusts, may also have different rules. Moreover, different factors may come into play depending on the type of retirement account.

What Happens If RMD Is Not Taken In Year of Death?

If the RMD isn’t taken in the year of death, it can lead to significant penalties. The IRS usually imposes a 25% tax (though this can vary) on the amount that wasn’t withdrawn, in addition to the usual income tax on the distribution.³

Thankfully, the IRS does offer a way to potentially avoid this penalty. Beneficiaries can apply for a waiver by explaining the reason the RMD was missed through a self-certification process.  Although approval is not guaranteed, it provides a chance to reduce the penalty if the IRS accepts the explanation.³

In some cases, quickly taking action can mitigate the issue. Beneficiaries can withdraw the missed RMD and then work with a tax professional to file the necessary paperwork with the IRS, possibly lessening the financial impact.

IRA RMD In Year of Death: Other Key Rules to Know

Managing an RMD in the year of death involves several specific rules, which vary depending on the type of retirement account and the beneficiary. Here are the essential points you should be aware of:

Traditional IRA Rules: If the IRA owner dies, the RMD for that year still needs to be taken. This applies whether the original account holder had already begun taking their distributions or not. The responsibility for this now falls on the beneficiaries, and the amount of the RMD is typically determined using the original owner’s life expectancy.

When the RMD Must Be Taken vs. Deferred: In the case of traditional IRAs, beneficiaries generally have to take the RMD in the year the owner dies, but if the owner hadn’t reached their required beginning date (RBD), it might not be necessary. However, if the original account holder had already begun taking their RMDs, the responsibility for withdrawing the remaining amount for the year shifts to the beneficiary.⁴ 

Calculation of the Year of Death RMD: To determine the RMD for the year of the account holder’s death, you use the account balance at the end of the prior year, divided by a life expectancy factor set forth in IRS Publication 590-B (Distributions from Individual Retirement Arrangements).⁵ The factor used corresponds to the owner’s age at the start of the year they passed away. 

Deadline for Year of Death RMD: The deadline to withdraw the year-of-death RMD is December 31st of the year in which the owner passed. If this RMD is not taken, the IRS may impose a 25% penalty on the amount that was supposed to be distributed. 

Tax Implications for Beneficiaries: When a beneficiary takes the RMD, the amount must be included in their taxable income for that year. Whether the beneficiary is a spouse or non-spouse, and whether the account is a traditional or Roth IRA, influences the specifics of the withdrawal process.

Please Note: To reduce taxes, beneficiaries can consider several strategies. One approach is to spread withdrawals over a period of time to avoid a large tax bill in a single year. Another option is rolling over inherited IRAs to stretch out distributions, which may offer greater flexibility and minimize the immediate tax impact.

Year of Death RMD for Multiple Beneficiaries

Handling the required minimum distribution (RMD) when an IRA has multiple beneficiaries can be challenging, especially in the year of death. Each beneficiary is responsible for their portion of the RMD, and dividing this correctly is essential to avoiding penalties. Here are some important things to keep in mind:

Dividing RMDs Among Multiple Beneficiaries: When there are several beneficiaries, the RMD for the year of death must be divided based on each person’s share of the inheritance. Every beneficiary is responsible for withdrawing their respective portion of the RMD.⁶ The total amount must be taken by December 31st of the year the account owner died to avoid penalties.

Trusts as Beneficiaries: When a trust is listed as a beneficiary, different rules apply. If the trust is categorized as a “look-through” trust, RMDs can be based on the life expectancy of the beneficiaries of the trust..⁷ 

Coordinating with Beneficiaries: With multiple beneficiaries, clear communication is an important factor when making sure everyone takes their share of the RMD on time. Failure to coordinate could result in penalties that affect each beneficiary. Proper planning can prevent confusion and make the distribution process more manageable.

RMD for Inherited IRA In Year of Death

When someone inherits an IRA, specific rules must be followed to handle required minimum distributions (RMDs), particularly in the year of death. How the RMD is managed depends on whether the beneficiary is a spouse or non-spouse, as each has different requirements and options.

A spouse inheriting an IRA as a sole-beneficiary has multiple options. They can choose to take ownership of the assets and place them inside their own account, which allows them to push off mandatory withdrawals until they turn 73. Alternatively, they could transfer the assets into an inherited IRA account as, which provides early access to the funds with no early withdrawal penalties but may come with heavier tax consequences.⁸

For most non-spouse beneficiaries, the option to treat the inherited account as their own is not available, meaning they often must deplete the account within 10 years. However, if the beneficiary is classified as an eligible designated beneficiary, they have more options. They can either take distributions based on the longer of their life expectancy or the remaining life expectancy of the original account holder. If the account owner passed away before their required beginning date (RBD), the beneficiary may still opt for the 10-year distribution rule.⁹

Please note: Individuals classified as eligible designated beneficiaries include surviving spouses, minors, or people with disabilities or chronic illnesses, as well as those who are less than 10 years younger than the original IRA owner.⁹

Special Considerations for Roth IRAs and RMDs In Year of Death

When it comes to Roth IRAs, the rules around required minimum distributions (RMDs) differ significantly from those for traditional IRAs, especially after the account owner passes away. A key feature of Roth IRAs is that the original account holder is not required to take RMDs during their lifetime, including the year of death. 

This means there’s no immediate obligation for beneficiaries to take a distribution that year. However, once the account is inherited, the steps a beneficiary must take will vary depending on their connection to the deceased account owner.

Though Roth IRA owners aren’t required to take minimum distributions, the situation changes for beneficiaries. Non-spouse beneficiaries need to deplete the account within 10 years, but they have the flexibility to choose when to take distributions during that time frame.¹⁰ 

Spouses, on the other hand, have additional options. They can roll the inherited Roth into their own IRA, delaying withdrawals, or choose a method based on their own life expectancy. Alternatively, they can follow the 10-year rule or take all the funds in one lump sum, providing them with greater flexibility in managing the account.¹⁰

Please Note: Since Roth IRAs grow tax-free, beneficiaries should carefully consider when to take distributions. Delaying withdrawals allows the account to continue growing without incurring taxes, making thoughtful planning important for maximizing potential growth while staying within the distribution rules.

We Can Help You with Your Retirement Savings

Handling required minimum distributions (RMDs) in the year of death can be complex, but understanding the rules can help prevent costly penalties and tax issues. Whether you are dealing with traditional IRAs or Roth IRAs, knowing what steps to take is important for beneficiaries to meet IRS rules.

Proper preparation is key. Taking the RMD on time, being aware of how the rules vary based on the type of beneficiary, and planning for the tax implications can reduce the risk of errors. 

If you’re unsure about how to proceed with RMDs after an account holder passes away, seeking professional advice can make all the difference. A knowledgeable advisor can guide you through the process, help avoid mistakes, and make sure you’re following all IRS regulations. Schedule an introductory call with one of our advisors today to get the assistance you need!

Sources:

1. https://www.schwab.com/learn/story/rmd-reference-guide
2. https://thelink.ascensus.com/articles/2023/8/11/rmd-rules-when-an-ira-owner-dies
3. https://www.investopedia.com/articles/retirement/05/011005.asp
4. https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
5. https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
6. https://investor.vanguard.com/investor-resources-education/retirement/rmd-rules-for-inherited-iras
7. https://www.kitces.com/blog/qualifying-a-see-through-trust-as-an-ira-designated-beneficiary-conduit-or-accumulation/
8. https://www.troweprice.com/en/us/insights/how-laws-governing-inherited-IRAs-may-mean-changes-to-your-legacy-plan
9. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary#:~:text=If%20the%20account%20holder’s%20death,Follow%20the%205%2Dyear%20rule
10. https://www.investopedia.com/roth-ira-required-minimum-distribution-rmd-4770561