Older EDB and Death On or After the RBD

IRS proposed regulations, issued last February, provide guidance based on the changes made by the SECURE Act of 2019. With these regulations, the IRS has provided an interesting new rule that specifically affects nonspouse eligible designated beneficiaries (EDBs) who are older than a Traditional (including SEP and SIMPLE) IRA owner who died on or after their required beginning date (RBD).

Individual Beneficiary and Death On or After RBD Under Previous Regulations

Prior to the SECURE Act (deaths before 2020), when a Traditional IRA owner died on or after their RBD and the beneficiary was a nonspouse individual, the previous IRS regulations provided that for years following the year of death, the IRA funds must be distributed with a series of payments based on the longer of the beneficiary’s nonrecalculated single life expectancy (SLE) (determined using the beneficiary’s age in the year after the IRA owner’s death and reduced by one each year), or the deceased IRA owner’s remaining nonrecalculated single life expectancy (determined using the IRA owner’s age in the year of death and reduced by one each year). As a practical matter, if the beneficiary was older than the IRA owner, the deceased owner’s (longer) remaining SLE would be used to calculate death required minimum distributions (RMDs). Death RMDs would continue each year until the IRA funds were depleted.

New Rule for an Older EDB and Death On or After RBD

When the EDB is older than the deceased IRA owner, although distributions for years following the year of death are calculated using the remaining SLE of the (younger) deceased IRA owner, the regulations now say that any remaining IRA funds must also be fully distributed by December 31 of the year in which the nonspouse beneficiary’s nonrecalculated SLE factor would have been less than or equal to one.

Example: Henry was age 80 in 2022 and is the beneficiary of his sister Traci’s Traditional IRA. Traci died in 2022, after taking her 2022 lifetime RMD, and would have been age 75 in 2022 (Traci died after her RBD). Because Henry is not more than ten years younger than Traci (i.e., he is 5 years older), Henry is an EDB. As an EDB of a Traditional IRA owner who died on or after her RBD, Henry is subject to the SLE rule. He must begin taking death distributions by December 31, 2023 (December 31 of the year following the year of death). To calculate how much Henry must take each year, because Henry is older than Traci, he will use Traci’s remaining SLE in the year of death, reduced by one for each subsequent year. In 2022, Traci would have been age 75, and the SLE of a 75-year-old is 14.8 years. Henry’s first death RMD for 2023 is calculated using the December 31, 2022, IRA balance divided by 13.8 (14.8 – 1 year). The factor continues to be reduced by one for subsequent years (i.e., for 2024, the factor will be 12.8 (14.8 - 2 years), and so on).

In addition, the remaining IRA funds must be distributed by December 31 of the year Henry’s SLE factor is less than or equal to one. While the remaining SLE of a nonspouse individual is normally based on the beneficiary’s age in the year after death, an example provided by the IRS in the proposed regulations uses the beneficiary’s age in the year of death, reduced by one for each subsequent year. Therefore, based on the IRS example, for 2022, Henry was age 80 and his SLE factor would be 11.2 years. The factor will be less than or equal to one in 11 years (11.2 – 11 years = 0.2). Thus, any remaining IRA funds must be distributed by December 31, 2033 (11 years after 2022), even though there were 3 years left on Traci’s remaining SLE in 2033. In essence, the new regulations contain a life expectancy limit for older EDBs that mandate that you watch the SLE of the beneficiary and fully distribute the IRA balance the year the beneficiary’s SLE is less than or equal to one year, even though death RMDs were based on the decedent’s remaining SLE.