Beneficiaries May Need To Take An RMD From A Decedent’s IRA In The Year They Pass Away

A common mistake that beneficiaries of retirement accounts make when they inherit either a Traditional IRA or 401(k) account is not knowing that if the decedent was required to take an RMD (required minimum distribution) for the year but did not distribute the full amount before they passed, the beneficiaries are then required to withdrawal that amount from the retirement account prior to December 31st of the year they passed away.  Not taking the RMDs prior to December 31st could trigger IRS penalties unless an exception applies.

The RMD Requirement for the Decedent

Once you reach a specific age, the IRS requires taxpayers to begin taking mandatory annual distributions from their pre-tax retirement account each year.  These mandatory annual distributions are called RMDs or required minimum distributions.   The age at which an individual is required to begin taking RMDs is also referred to as the “Required Beginning Date” (RBD).  The Required Beginning Date is based on your date of birth:

• Born 1950 or earlier:  Age 72

• Born 1951 – 1959:      Age 73

• Born 1960 or later:      Age 75

Example:  If Jim was born in 1951 and turns age 73 this year, and Jim has a Traditional IRA with a $500,000 balance,  in 2024, Jim would be required to withdraw $18,867 from his IRA as his annual RMD and pay tax on the distribution. 

Undistributed RMD Amount When Someone Passes Away

It’s a common situation for an individual who has reached their Required Beginning Date for RMDs to pass away prior to distributing the required amount from their IRA account for that calendar year.

Example: Jen is age 81; she passed away in February 2024 with a $300,000 balance in her Traditional IRA.    Her RMD amount for 2024 would be $15,463.  If Jen only distributed $3,000 from her IRA prior to passing away in February, the beneficiary or beneficiaries of Jen’s IRA would be required to withdraw the remaining amount of her RMD, $12,463, prior to December 31, 2024, otherwise the beneficiaries will be faced with a 10% to 25% excise tax on the amount of the RMD that was not withdrawn prior to December 31st.

A Single Beneficiary

If there is only one beneficiary that is inheriting the entire account balance, the process is easy: determine the remaining amount of the decedent’s RMD, and then process the remaining RMD amount from the IRA account prior to December 31st of the year that they passed away. 

Multiple Beneficiaries

When there are multiple beneficiaries of a pre-tax retirement account, the IRS recently released new regulations clarifying a question that has been in existence for a very long time.

The question has been, “If there are multiple beneficiaries of a retirement account, does EACH beneficiary need to distribute an equal share of the decedent’s remaining RMD amount OR do they collectively just have to make sure the remaining RMD amount was distributed but it does not have to be in equal shares?”

I’ll show you why this matters in an example:

Susan passed away before taking her $20,000 RMD for the year. She has a $200,000 balance in her Traditional IRA, and her two kids, Scott and Wanda, are both 50% primary beneficiaries on her account.    The kids set up separate inherited IRAs and transfer their $100,000 shares into their respective accounts.  Scott intends to take a $50,000 distribution from his Inherited IRA, pay the tax, and buy a boat, but Wanda, who is a high-income earner, wants to avoid taking taxable distributions from her Inherited IRA until after she retires.

Since Scott took enough out of his Inherited IRA to cover Susan’s full $20,000 undistributed RMD in the year she passed, is Wanda relieved of having to take an RMD from her account in the year that Susan passed, or does she still need to distribute her $10,000 share of the $20,000 RMD?

The new IRS regulations state that the decedent’s undistributed RMD amount is allowed to be satisfied by “any beneficiary” in the year that they pass away.  Meaning the RMD does not have to be distributed in equal amounts to each beneficiary, as long as the total remaining RMD amount is distributed by one or more of the beneficiaries of the decedent. 

In the example above, if Scott processed $50,000 from his inherited IRA in the year that Susan passed, Wanda would not be required to take a distribution from her inherited IRA that year because Susan’s $20,000 remaining RMD amount is deemed to be fulfilled.

A Decedent With Multiple IRAs

It’s not uncommon for an individual to have more than one Traditional IRA account when they pass away.  The question becomes if they have multiple IRAs and each of those IRAs has an undistributed RMD amount at the time the decedent passes away, can the beneficiaries total up all of the undistributed RMD amounts and take the full amount from one single IRA account OR do they have to take the undistributed RMD amount from each IRA account?

The answer is “it depends”.  It depends on whether the beneficiaries are the same or different for each of their IRA accounts.

Multiple IRAs – Same Beneficiaries

If the decedent has multiple IRAs but the beneficiaries are exactly the same as all of their IRAs, then the beneficiaries are allowed to aggregate the undistributed RMD amounts together and distribute that amount from any IRA or IRAs that they choose before the end of the year. 

Multiple IRAs – Different Beneficiaries

However, in the instance that the decedent has multiple IRAs but has different beneficiaries listed amongst the different IRA accounts, then the decedent’s undistributed RMD amount needs to be taken from each IRA account.

Privacy Issue with Multiple Beneficiaries

I have been a financial planner long enough to know that not all family members get along after someone passes away.  If the decedent had an undistributed RMD amount in the year that they passed and the beneficiaries are not openly sharing their plans regarding how much they plan to withdraw out of their inherited IRA in the year the decedent passed away, it may be impossible to coordinate the disproportionate distributions between the multiple beneficiaries defaulting the beneficiary to taking their equal share of the undistributed RMD amount.

IRS Penalty For Missing RMD

If the beneficiaries fail to distribute the decedent’s remaining RMD amount before December 31st of the year that they pass away, then the IRS will assess a 25% penalty against the amount that was not timely distributed from the IRA account. 

Special Note:  The IRS penalty is reduced to 10% if corrected in a timely fashion.

Automatic Waiver of the RMD Penalty

The final regulations released by the IRS in 2024 granted a very favorable automatic waiver of the missed RMD penalty that did not exist prior to July 2024.    The automatic waiver originally stemmed from the common scenario that if the decedent passed away in December and had not yet satisfied their RMD amount for the year, it was often difficult for the beneficiaries to work with the custodians of the IRA to get those distributions processed prior to December 31st. However, the IRS, being oddly gracious, now provides beneficiaries with an automatic waiver of the missed RMD penalty, specifically for undistributed RMD amounts for a decedent, up until December 31st of the year AFTER the decedent’s death to satisfy the RMD requirement.

When Is No RMD Required?

I have gone through numerous scenarios without stating the obvious.  If the decedent either died before their Required Beginning Date for RMDs or if they died AFTER their Required Beginning Date but distributed their full RMD amount prior to passing away, the beneficiaries are not required to distribute anything from the decedent’s IRA prior to December 31st in the year that they passed away. 

Also, if the Decedent had a Roth IRA, Roth IRAs do not have an RMD requirement, so the beneficiaries of the Roth IRA would not be required to take an RMD prior to December 31st in the year the decedent passes away.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.