IRS Notice 2024-35 provides tax relief from penalties for failure to take certain required minimum distributions (RMDs). This relief generally applies to non-spousal beneficiaries of inherited retirement accounts.

First, the general RMD rules . . .

The required beginning date for required minimum distributions (RMDs) from retirement accounts such as traditional IRAs and pretax 401(k)’s is April 1 of the year following the year in which a taxpayer attains age 73.

If an RMD is not taken when due, the account owner is assessed an excise tax penalty equal to 25% of the amount by which the RMD amount falls short.

Then, the rules for retirement account beneficiaries . . .

When the owner of a retirement account dies, the timeframe for distributing their inherited account balance depends on two things – the relationship of the beneficiary to the account owner, and whether the account owner died after the RMD required beginning date.

These rules changed for retirement account beneficiaries after 2019 based on the SECURE Act. The current rule is this:

If the owner of a retirement account passes away in 2020 or after, most non-spouse beneficiaries of that account are required to withdraw the entire account balance within a 10-year time period (AKA “the 10-year rule”). Before enactment of the SECURE Act, the distribution period could be as long as the life expectancy of the beneficiary, but now that provision only applies to spouses, minor children, and certain other “eligible designated beneficiaries”.

Here’s the confusion:

Does the 10-year rule mean that a non-spouse beneficiary can wait until Year #10 to take the distribution? The IRS issued a proposed rule in 2022 indicating that RMDs would also be required in years 1-9. But since that rule is “proposed” and not “final”, it wouldn’t be fair to assess penalties to beneficiaries who fail to take those annual distributions before Year #10. Hence the penalty relief for beneficiary RMDs in 2020, 2021, 2022, 2023, and now 2024.

The confusion should be short lived. Hopefully.

Notice 2024-35 includes a note that final regulations are anticipated that will assist in determining RMDs for 2025 and beyond. We will look forward to it.