Your RMD questions answered

The IRS’ proposed regulations on required minimum distributions released on Feb. 23 created a flood of questions from advisers on how the post-death RMD rules would work. The IRS’s interpretation of the 10-year rule was not what most people expected.

My last article went through the basic rules, and now here are answers to the follow-up questions advisers have asked most frequently.

Most of the latest confusion revolves around the revelation that annual RMDs are required for years one through nine after death, based on the so-called “at least as rapidly” rule, which these questions and answers address.

Q: Where does IRS come up with RMDs for years one to nine under the SECURE Act? I thought the 10-year rule replaced those RMDs?

A: So did I! But IRS says “No.” The IRS is relying on the “at least as rapidly,” or ALAR, rule. Under long-existing RMD tax rules, the ALAR rule essentially states that once RMDs begin, they can’t be stopped or turned off by a beneficiary.

This is the rule on which IRS bases its position that RMDs are required for years one through nine of the 10-year period when death occurred on or after the required beginning date, or RBD. When an IRA owner dies after the RBD, the beneficiary must continue taking RMDs. However, the ALAR rule doesn’t mean that the beneficiary must take the same RMD amounts the IRA owner was taking. It means that the beneficiary must continue using the same process by calculating RMDs based on that beneficiary’s own life expectancy (the stretch IRA), as explained in the answer to the next question.

Q: For beneficiaries who are subject to the 10-year rule, how are the RMDs calculated for years one through nine after death?

A: Designated beneficiaries (individual beneficiaries who are named on the beneficiary form and aren’t eligible designated beneficiaries or EDBs) will be subject to the 10-year rule. But if they inherited from someone who died after the RBD, then they’re subject to RMDs for years one through nine, and then a full distribution of the balance in the inherited traditional IRA by the end of the 10^th year after death.

The RMDs for years one through nine of the 10-year period are based on the beneficiary’s age in the year after death, the same process as with the lifetime stretch IRA. The beneficiary finds the life expectancy factor from the Single Life Table (the new 2022 table) for the year after death and divides the prior year-end balance by that factor. For subsequent years two through nine, the beneficiary reduces that factor by one. It’s as if the beneficiary is getting the stretch IRA for the first nine years after death and it’s calculated the same way. For the RMD in year 10, no table is needed since that RMD is simply 100% of the remaining balance in the inherited account.

If the IRA owner died before the RBD, then no annual RMDs are required for years one through nine, but the balance must still be withdrawn by the end of the 10-year term.

Q: Can a spouse use the 10-year rule to delay RMDs?

A: The IRS says no in these proposed regulations. It goes further than that, though. The IRS created yet another new term to know, “hypothetical RMDs,” as a type of deterrent to ensure no RMD years are missed once a spouse would otherwise have been required to take those RMDs by reaching age 72.

Here’s an example. Ken and his wife Linda are both 70 years old. Ken dies with Linda as his primary IRA beneficiary. As an EDB spouse, Linda can do a spousal rollover or elect to remain a beneficiary. If Linda elects to remain a beneficiary, she can also elect the 10-year payout. Since Ken died prior to reaching his RBD, Linda will have no RMDs during the 10-year window. She simply has to empty the account by Dec. 31 of the 10th year after the year of Ken’s death. There’s no deadline for a spousal rollover, so Linda may believe that she can have her cake and eat it too. She may think she can use the 10-year rule (without annual RMDs) and then do a spousal rollover years later to avoid several years of annual RMDs that she otherwise would have had to take from her own IRA. That is the “loophole” the IRS is closing with this “hypothetical” retroactive spousal RMD provision.

Once again, the IRS is relying on a version of the ALAR rule. In this case though, it involves a spouse who otherwise would have been able to skip RMDs by using the 10-year rule.

In a later year (but before the end of year 9), when Linda decides to do the spousal rollover, she can’t roll over the full amount. Before completing the spousal rollover, Linda must calculate hypothetical RMDs for each year she was 72 or older. These hypothetical RMDs aren’t eligible for rollover. (The years when Linda was 70 and 71 aren’t considered because they were before her first RMD year.)

Q: How do RMDs work when a minor child of the IRA owner inherits?

A: A minor child of the deceased IRA owner (or plan participant) is an EDB, but only up to age 21. The proposed regulations state that this is the universal age of majority for this rule, regardless of state law. This is a good rule that not only simplifies the age of majority issue but is also generous given that the age of majority in most states is 18.

Once a qualifying minor (under age 21) inherits an IRA, the minor gets the stretch IRA until the year she turns age 21, but then she switches to the 10-year rule. At that point, the entire remaining balance must be withdrawn by the end of the 10-year term.

However, under one interpretation of these rules, the child must continue taking RMDs for years one through nine, even if the minor inherited from someone who died before the RBD. This would be the same rule if the minor inherited a Roth IRA.

Again, the rationale behind this interpretation (and there are some who take a different view of these messy RMD rules) is that since RMDs were begun by the minor as an EDB, the ALAR rule doesn’t allow them to stop when the 10-year rule turns on once she turns age 21. Under this view, annual RMDs must continue even if she inherited from someone who died before beginning RMDs.

Hopefully, at some point, the IRS will provide more clarity on these scenarios and the ALAR rule.

For more information on Ed Slott and Ed Slott’s 2-Day IRA Workshop, please visit www.IRAhelp.com.