The IRS Notice 2024-35 provides important guidance on Required Minimum Distributions (RMDs) for 2024 and introduces the timeline for the application of final regulations that will impact RMDs from 2025 onwards. The IRS Notice 2024-35 provides significant relief and guidance for RMDs in 2024, especially concerning missed distributions and excide penalties.
Here are some key elements of the notice and its implications for individuals with retirement accounts.
Background on RMDs
RMDs are mandatory withdrawals that must be taken from retirement accounts, such as 401(k) plans, IRAs, and similar retirement savings vehicles. The rules governing RMDs are detailed under Section 401(a)(9) of the Internal Revenue Code (IRC). These distributions ensure that individuals spend their retirement savings and do not defer taxes indefinitely.
Key Points:
- Section 401(a)(9): Establishes the rules for RMDs during an employee’s lifetime and after their death.
- Required Beginning Date: The date by which RMDs must commence, generally April 1 of the year following the year the individual turns 73 (as updated by the SECURE 2.0 Act).
New Guidance for 2024
The IRS Notice 2024-35 introduces specific guidance for RMDs in 2024, especially focusing on situations where distributions were not made as required.
- Relief for Missed Distributions: For defined contribution plans that failed to make a specified RMD in 2024, the plan will not be considered non-compliant with § 401(a)(9).
- Excise Tax Relief: Taxpayers who did not take a specified RMD in 2024 will not be subject to the excise tax under § 4974.
Special Rules for Inherited IRAs and Beneficiaries
The SECURE Act and the SECURE 2.0 Act have introduced changes to the RMD rules for inherited IRAs:
- 10-Year Rule: Generally, beneficiaries must empty the inherited account by the end of the 10th year following the account owner’s death. No distributions are required during those 10 years, but the account must be fully distributed by the end of the period.
- Eligible Designated Beneficiaries: These include surviving spouses, minor children of the deceased, disabled or chronically ill individuals, and beneficiaries less than 10 years younger than the decedent. They can opt for lifetime or life expectancy payments instead of the 10-year rule.
Impact of Final Regulations Starting 2025
The final regulations related to RMDs will be effective for calendar years beginning on or after January 1, 2025. This means that any changes or updates included in the final regulations will not impact RMDs for 2024 but will be applicable for distributions starting in 2025.
Throwback and Throw-Out Rules
The IRS Notice 2024-35 also touches on the throwback and throw-out rules that some states use to determine state income tax liabilities:
- Throwback Rule: Utilized by states like California, Illinois, and Massachusetts, this rule mandates that income not taxed in the state where it was earned (nowhere income) is “thrown back” and taxed by the taxpayer’s state of residence.
- Throw-Out Rule: States like Kentucky and Louisiana employ this rule to exclude nowhere income from the sales factor denominator, effectively increasing the portion of income subject to tax in the taxpayer’s state of residence.
Looking Ahead
The IRS continues to provide updates and guidance to ensure clarity and compliance with RMD regulations. Individuals and plan administrators should stay informed about these changes and consult with financial advisors to ensure they meet all requirements and maximize their retirement savings benefits.
Consulting with a financial adviser can help navigate these complex rules and optimize retirement planning.
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