Year of Death Required Minimum Distributions for IRAs
Once an IRA owner turns age 73, he or she must begin receiving lifetime required minimum distributions (RMDs) based on the total value of all IRAs owned and their applicable life expectancy obtained from IRS tables.
To avoid the onerous 50% penalty for failing to take one, the first RMD must be taken by April 1 of the year after turning 73. This date is known as the "required beginning date". Subsequent RMDs then are required on a calendar year basis no later than December 31 of any given year, meaning under the April 1 rule just mentioned, the first two RMDs may end up being required in the single calendar year that follows the year you reach age 73.
The correct way to handle an RMD in the year of the IRA owner's death is a question that commonly arises. It should be noted first that an RMD will only have to be taken if the IRA owner's death occurs AFTER his or her required beginning date. As stated earlier, the required beginning date is April 1 of the year following turning age 73. Thus, if the owner dies BEFORE this April 1 date, there is no RMD required for the year of death, even if the owner had already had their 73rd birthday.
If, on the other hand, RMDs have already commenced, the rule is different. If the owner dies before taking the year of death RMD, it still must be withdrawn by the end of the year as if the IRA owner had lived. Death does not, unfortunately, provide a waiver of the RMD rule.
Importantly, the RMD is paid to the IRA beneficiary or beneficiaries, not to the owner's estate, unless such estate is the actual beneficiary. Thus, it is the beneficiary that is responsible for reporting the income and paying any applicable taxes.
Logistically, the way this usually happens is that the IRA custodian will open what is known as an inherited IRA for each beneficiary first, transfer all the IRA assets to it and then make the RMD.
Interestingly, in cases of multiple beneficiaries, it does not matter who takes the year-of-death RMD. It can be split among the beneficiaries or even all taken by just one. For instance, if one of the beneficiaries chooses to cash their account in completely and take a lump-sum distribution, if the lump-sum is enough to cover the RMD, then no one else is required to take one in the year of death.
Finally, the deadline for taking the RMD is December 31 of the year of death, just like it would have been for the IRA owner. This can cause a hardship sometimes, especially if the owner dies late in the year, because often in dealing with the inevitable final matters of the decedent, not to mention grief, the deadline is missed. Fortunately, the IRS recognizes this hardship and gives an automatic waiver of the 50% penalty for failure to take the RMD so long as the RMD is taken by the beneficiary's tax return filing deadline (including extensions).
Of course, the story doesn't end there with regard to future RMDs that must be taken by a beneficiary of an inherited IRAs. For those choosing not to simply take a lump-sum distribution of the IRA, the beneficiary now has an RMD requirement of their own to follow. But those rules are a topic for another day.
