IRS Notice 2024-35 Explained

In the words of one of Yogi Berra’s most memorable Yogi-isms, “It’s déjà vu all over again.” For the fourth consecutive year the IRS is excusing beneficiaries of inherited IRAs subject to the 10-year rule from making their 2024 required minimum distributions*. The IRS made the announcement on Tuesday, April 15, 2024, when they issued Notice 2024-35.

*Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year.

Background

A little background is helpful to understand this new relief. In the past, beneficiaries of an inherited IRA used their life expectancy to minimize IRA withdrawals over time, which led to them being called “Stretch IRAs.” The original SECURE Act did away with life expectancy and instead required that beneficiaries of IRAs inherited beginning in 2020 withdraw the entire balance by the end of the 10th year after the year of the original IRA owner’s death.

Later, in 2022, the IRS proposed a second regulation which required beneficiaries who inherit an IRA from someone who died after reaching their required beginning date (known as the RBD, which is generally April 1 of the year after the year the IRA owner turns 73) to also take RMDs. In other words, beneficiaries of an inherited IRA for which the original owner had reached their RBD, would be required to take an RMD in years one through nine of the 10-year period in which they must withdraw the entire balance.

The proposed regulation for RMDs under the 10-year rule led to much confusion. As a result, the IRS granted a waiver from excise tax for any beneficiary of an inherited IRA under the 10-year rule who did not take and RMD for 2021 and 2022. The IRS again granted the waiver in 2023, and now again for 2024. Moving forward, inherited IRA beneficiaries and wealth management professionals are left to wonder whether the proposed regulation for RMDs under the 10-year rule will be waived again in future years, eliminated altogether, or if it will be enforced beginning in 2025.

It’s important that beneficiaries of an inherited IRA understand that the waiver is for the excise tax that would be owed for not making an RMD, not a waiver of the RMD itself. Practically speaking, the result is the same: a beneficiary of an Inherited IRA subject to the 10-year rule will not be penalized for failing to make an annual RMD for the years 2021 through 2024.

Who Does the New Waiver Not Apply To?

Because of the confusion caused by the waiver notices, it’s important to specify who the waiver does not apply to. Notice 2024-35 does not apply to an IRA which is still owned by the original owner during their lifetime. The RMD relief only applies to beneficiaries of an IRA that was inherited in 2020 or later. Additionally, an inherited Roth IRA is not subject to RMDs and withdrawals can be made tax-free anytime within the 10-year period. One final exception to the waiver is for beneficiaries of an inherited IRA who qualify as an Eligible Designated Beneficiary (EDB). An EDB is not subject to the 10-year rule and is not subject to the waiver. Any owner of an IRA which the waiver does not apply to must keep making annual RMDs as required by IRS regulations.

What is an Eligible Designated Beneficiary?

Who qualifies as an Eligible Designated Beneficiary? The SECURE Act specifies that the following categories of beneficiaries that qualify as an EDB:

1. 1.Surviving spouses
2. Minor children of the Decedent (only until they reach age 21)
3. Chronically ill individuals
4. Disabled individuals (per strict IRS guidelines)
5. Individuals older than, or not more than 10 years younger than, the Decedent.

Any of these beneficiaries are still subject to the Stretch IRA rules for inherited IRAs and must still take an RMD.

Should I skip my RMD if I’m subject to the waiver?

So, you’re the beneficiary of an inherited IRA that is subject to the waiver. You’re probably wondering whether you should take advantage of the waiver or just make your annual RMD anyway. The answer depends on each individual beneficiary’s circumstances. Remember that each withdrawal from an inherited traditional IRA is subject to federal income tax and, if applicable, state income tax.

On one hand, the 10-year rule offers the advantage of taking your RMD each year and spreading out the tax burden over the entire 10-year period. This could help avoid a larger tax burden by waiting to withdraw funds and take RMDs over the remaining years after the waiver is no longer provided. On the other hand, it might be more tax-efficient to wait if there’s an anticipated change in income. For instance, a beneficiary planning to retire in the next few years might find themselves in a lower tax bracket. A beneficiary might also be planning a move to a state with no income taxes. In both of those circumstance, it’s possible that waiting to withdraw funds from their inherited IRA will lead to lower taxes.

There’s no one-size fits all solution. We recommend that you consult with your tax and financial advisors to discuss whether taking advantage of the waiver is in your best interest.

Will there be any future waivers?

The IRS clarified in Notice 2024-35 that they expect to finalize the proposed SECURE Act regulations issued in February 2022 so that they will take effect beginning in 2025. That means that we can likely expect the final regulations to be issued later in 2024. As mentioned above, the final regulations may require that beneficiaries of an inherited IRA take their RMD beginning in 2025, the IRS could issue an additional waiver, or they could opt to eliminate the RMD requirement under the 10-year rule altogether. No matter which way the IRS decides to go, it’s important for beneficiaries of an inherited IRA subject to the 10-year rule to be on the lookout for the final regulations so they can act accordingly beginning in 2025.