The RMD evolution: understanding the 2024 required minimum distribution regulations
On July 19, 2024, the IRS and Treasury Department published the highly anticipated final regulations for required minimum distributions (RMD), updating the rules under Section 401(a)(9) and other related sections of the Internal Revenue Code (final regulations). These changes reflect the RMD modifications made by the SECURE Act of 2019 and the SECURE 2.0 Act of 2022. They also issued proposed regulations (2024 proposed regulations) to provide further details related to the SECURE 2.0 changes. To help you understand these new regulations, we’ve put together a summary of key rules affecting 401(k) and other defined contribution plans.
Effective date of RMD regulations
Both the final and 2024 proposed regulations apply to RMDs required for distribution calendar years beginning on or after January 1, 2025. Until that date, RMDs may be calculated using the old rules, but must take into account a reasonable, good faith interpretation of the changes implemented by the SECURE Act and SECURE 2.0.
Highlights of the IRS RMD rules
The final regulations mostly align with the proposed RMD regulations issued in 2022, with some revisions based on feedback received by the IRS and the Treasury Department. They were also updated for the new RMD rules created under SECURE 2.0. There may be additional changes or clarifications under the 2024 proposed regulations depending on the comments received during the comment period, which ends on September 17, 2024.
As noted above, our summary focuses on 401(k) and other defined contribution plans. The impact on IRAs, 403(b) plans, and 457(b) plans is beyond the scope of this article.
Increased age for required beginning date
Increased age for required beginning date
The date when RMDs must start is known as the required beginning date, or RBD. For accounts under an employer-sponsored retirement plan, RMDs must start by April 1 of the calendar year following the year the participant reaches the applicable RMD age, which is:
- 70½ if born before 7/1/49
- 72 if born after 6/30/49 and before 1951
- 73 if born after 1950 and before 1960
- 75 if born after 1959
However, if the participant isn’t a 5% owner of the company, RMDs aren’t required to begin until April 1 following the calendar year in which the participant retires from the employer, if that date is later. For participants in a multiple employer plan (MEP), retirement is defined as no longer working for any of the employers covered under the MEP.
Once RMDs commence for a participant, they must be taken every year by December 31, including the calendar year of the RBD. Since RMDs for the initial year aren’t required until April 1 of the following year, a participant may potentially have to take two RMDs in that year.
Exclusion of designated Roth amounts
Exclusion of designated Roth amounts
Designated Roth amounts aren’t included in RMD calculations and payments during a participant’s lifetime. This rule is effective for RMDs due after 2023, excluding initial 2023 RMDs due by April 1, 2024. Designated Roth amounts are included in beneficiary RMDs, except for the year of the participant’s death, to the extent the RMD wasn’t taken by the participant prior to death.
If a participant isn’t required to take an RMD because the account consists only of Roth amounts, the participant’s death will be considered to have occurred before the RBD. This distinction is important for the beneficiary 10-year rule.
Beneficiary 10-year rule
Beneficiary 10-year rule
Beneficiaries of a participant who died after 2019 (other than eligible designated beneficiaries or nonperson beneficiaries) are subject to the 10-year rule. This means they must receive the participant’s entire interest by the end of the year containing the 10th anniversary of the participant’s death. Whether RMDs need to be made throughout the 10-year period depends on whether the participant died before or on/after their RBD.
- Died before their RBD: The beneficiary isn’t required to receive any distribution until the 10th year following the participant’s death.
- Died on or after their RBD: Distributions must continue each year based on the longer of the participant’s or beneficiary’s remaining life expectancy, with the entire interest distributed in the 10th year following the participant’s death.
This rule caused significant confusion as many retirement plan practitioners believed that regardless of whether a participant died before, on, or after their RBD, no distributions were required until the 10th year. Fortunately, the IRS granted relief for plan qualification failures and any excise tax to the beneficiary if distributions under the 10-year rule should’ve been made during 2021, 2022, 2023, or 2024 but weren’t.
Eligible designated beneficiary rules
Eligible designated beneficiary rules
Eligible designated beneficiaries (EDB) aren’t subject to the 10-year rule and may still stretch RMDs based on rules similar to those before the SECURE Act or SECURE 2.0. Beneficiaries are considered EDBs if at the time of the participant’s death, they are:
- A spouse
- A minor child of the participant (under age 21)
- A disabled or chronically ill individual
- Another person who’s no more than 10 years younger than the participant
Additionally, a beneficiary of a participant who died before 2020 may be treated as an EDB, allowing them to continue stretching their RMDs.
Under the stretch rule, also known as the life expectancy rule, an EDB must begin RMDs by the end of the year following the participant’s death and continue receiving RMDs for the remaining life expectancy of the beneficiary (or, in some cases, the participant). Once an EDB dies, or a participant’s child reaches age 21, any remaining interest must be distributed by the end of the 10th year following that event.
A plan may allow an EDB to elect the 10-year rule, instead of the stretch rule, if the participant died before their RBD. If elected, distributions aren’t required until the 10th year following the participant’s death.
Special rules apply when the beneficiary is the participant’s spouse.
Spousal beneficiary rules
Spousal beneficiary rules
- If the beneficiary is the participant’s spouse, RMDs may be deferred until the participant would’ve reached their RMD age (see “Increased age for required beginning date”).
- If the spouse dies after the participant but before RMDs start, they’re generally treated as the participant for determining RMDs to their beneficiaries.
- If RMDs to the spouse begin in 2024 or later, a new rule allows them to be calculated based on the uniform lifetime table instead of the single life table, resulting in significantly lower RMDs—over 40% less in most cases. This allows money to stay in the plan longer and continue to grow on a tax-deferred basis or, in the case of qualified Roth accounts, tax free.1
Optional rule for partial annuitization
Optional rule for partial annuitization
Under the old rules, if part of a participant’s account consisted of an annuity, the determination of RMDs from the non-annuitized portion was calculated separately and couldn’t consider any annuity payments. The new rule offers the option to aggregate the two portions for RMD purposes, allowing the total RMD to be offset by the annuity payments. This provision may prove to be especially impactful as certain retirement groups are advocating for the addition of annuity options as an investment alternative in defined contribution plans to help ensure a guaranteed income stream in retirement. Proposed legislation, if passed, would provide fiduciary protection to plan sponsors that default a portion of participants’ accounts into an annuity investment option in the absence of an election.
Rollover rules
Rollover rules
RMD amounts aren’t eligible for rollover and must be distributed before any other amounts are paid from the plan during a calendar year in which an RMD is due. This means that the first dollars distributed aren’t eligible for rollover and are subject to optional tax withholding rules, rather than the mandatory 20% tax withholding that applies to eligible rollover distributions.
Non-spousal beneficiaries can roll over amounts, excluding the RMD portion, in a trustee-to-trustee transfer to an inherited IRA. They can’t roll the money into their own IRA or retirement plan. If the participant dies before their RBD, and the beneficiary is subject to the 10-year rule, the entire vested account is eligible for rollover until the 10th year. However, in the 10th year, no amount is eligible for rollover as the entire amount is an RMD.
Spousal beneficiaries may roll over amounts, excluding the RMD portion, to their own IRA, retirement plan, or an inherited IRA. The IRS, however, has restricted spousal beneficiaries from using the 10-year rule to delay RMDs and then rolling the entire account into their own IRA or retirement plan to commence RMDs later. If an RMD is delayed beyond the participant’s RMD age, catch-up RMDs (calculated using a formula set in the regulations) aren’t eligible for rollover once the spouse reaches their RMD age, closing this loophole. Catch-up RMDs aren’t required if the spouse rolls over the account to an inherited IRA.
Reduced excise tax
Reduced excise tax
Under the old rules, failing to take an RMD resulted in a 50% excise tax for the taxpayer, unless a waiver was granted. The IRS routinely granted a waiver when the taxpayer filed Form 5329, recognizing the unfairness and severity of the assessment. Fortunately, SECURE 2.0 has reduced the penalty to 25%, with a possible further reduction to 10% if the RMD failure is corrected within two years. Waivers for failing to take an RMD may still be granted if the taxpayer files Form 5329 and establishes reasonable cause. However, with the new, reduced tax penalty, many retirement plan practitioners are concerned that the IRS may no longer simply rubber stamp their approval on waiver requests.
The excise tax for failing to take RMDs in the year of the participant’s death is automatically waived if the beneficiary receives the RMD by the end of the following calendar year, or if later, the beneficiary’s tax filing deadline (including extension) for the year of the participant’s death.
Partner with your plan’s providers to help you manage RMDs
Navigating RMD rules can be complex, as the timing and amounts are contingent on various factors, such as the participant’s status, the timing of death, and the relationship of beneficiaries to the participant at the time of death. Special caution should be taken when a participant has more than one beneficiary, or a trust is designated as a beneficiary, as it adds another layer of complexity to these rules, which is beyond the scope of this article. Additionally, some retirement plans may contain provisions that accelerate the time period for RMDs or require an amount greater than the RMD be paid out. Your plan’s consultant and financial professional, in conjunction with your tax and ERISA counsel, are your best resources to help ensure your plan’s RMDs are handled correctly.
To download our SECURE 2.0 white paper and access other helpful resources, please visit our SECURE 2.0 resource page.
Intended for Plan Sponsors
1 In this document, all tax disclosures regarding Roth 401(k) contributions are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made. The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
MGTS-PS 633219-GE 09/24 633219 MGR0820243799784
