Handling a Required Minimum Distribution in the Year of Death

When a retirement account owner passes away, their beneficiaries must navigate rules for the year of death. A Required Minimum Distribution (RMD) is the amount federal law requires to be withdrawn annually from certain retirement accounts once the owner reaches a specific age. These rules determine if a final RMD is due, who is responsible for taking it, and how it is taxed.

Determining if a Year-of-Death RMD is Required

The need to take an RMD in the year an account owner dies depends on their age relative to their Required Beginning Date (RBD). The RBD is the deadline for taking a first RMD, which is April 1 of the year after the individual turns age 73.

If the account owner passed away on or after their RBD, an RMD is required for the year of their death. The obligation to take that year’s distribution does not disappear with their passing. For example, an individual who turned 73, took their first RMD, and then died at age 75 would still have an RMD obligation for the year they died.

Conversely, if the account owner died before their RBD, no RMD is due for the year of death. This is true even if the owner died in the same year they reached age 73, as long as their death occurred before the April 1 deadline of the following year.

Fulfilling the Year-of-Death RMD Obligation

When an RMD is required for the year of death, the responsibility for the withdrawal shifts to the account’s beneficiaries if the owner did not take it. The deadline to take this distribution is December 31 of the year the owner died.

The RMD calculation is based on the decedent’s circumstances, not the beneficiary’s. To determine the amount, start with the account’s fair market value as of December 31 of the prior year and divide it by a life expectancy factor from the IRS’s Uniform Lifetime Table. The factor used corresponds to the age the account owner would have been in the year of their death.

For instance, an account owner who would have turned 80 had an IRA valued at $500,000 on December 31 of the previous year. Using the Uniform Lifetime Table, the factor for an 80-year-old is 20.2, making the RMD $24,752.

Beneficiaries must determine how much, if any, of this calculated RMD the decedent withdrew before death. If the decedent withdrew the full amount, the obligation is met. If only a partial amount was withdrawn, beneficiaries are responsible for withdrawing the remaining balance. If no distributions were taken, they must withdraw the entire RMD.

Tax Treatment of the Year-of-Death RMD

The tax liability for a year-of-death RMD falls to whoever receives the funds, and the distribution is taxed as ordinary income in the year it is received. This means the tax treatment follows the money, whether it goes to an individual beneficiary or to the decedent’s estate.

If the RMD is paid directly to a named beneficiary, that individual is responsible for reporting the income on their personal tax return. The financial institution will issue a Form 1099-R to the beneficiary, which details the gross distribution amount.

Should the RMD be paid to the decedent’s estate, the income is reported on the estate’s income tax return, Form 1041. The estate is then responsible for paying the associated income tax from its assets.

It is important to distinguish these tax rules from those that govern the inherited portion of the account in subsequent years. The tax treatment of this specific, final RMD is a standalone event and does not affect separate rules, such as the 10-year rule, that beneficiaries must follow for distributing the remaining balance.

Handling a Missed Year-of-Death RMD

Failing to take a required RMD by the deadline results in a penalty. The IRS imposes a 25% excise tax on the amount that should have been withdrawn but was not. This penalty can create an unexpected financial burden on beneficiaries who may have been unaware of the requirement.

The IRS provides a path for relief if the missed RMD is corrected in a timely manner. If the beneficiary withdraws the required amount and files the necessary paperwork within a two-year correction window, the penalty is automatically reduced from 25% to 10%. This correction window ends at the close of the second year following the year the RMD was due.

For beneficiaries who miss the deadline due to a valid reason, it is possible to request a complete waiver of the penalty. The first step is to withdraw the full RMD amount as soon as the oversight is discovered, which demonstrates a good-faith effort to comply with the rules.

Next, the individual must file IRS Form 5329. On this form, the beneficiary will report the shortfall but can request that the penalty be waived. A letter of explanation must be attached to the form, detailing the “reasonable cause” for the failure, such as grief or being unaware of the rule. If the IRS accepts the explanation, it has the authority to waive the entire penalty.