Back to Required Minimum Distributions

Required Minimum Distributions

  • 3682. What are the minimum distribution requirements for individual retirement plans?

    • Editor’s Note: The 2020 CARES Act waived all RMD requirements for 2020.

      Amounts accumulated in an individual retirement account or annuity (“IRA”) must be distributed in compliance with the minimum distribution requirements.[1]  The amount that must be distributed each year according to these rules is commonly referred to as the “required minimum distribution” (or RMD). For the calculation of lifetime distributions, see Q 3686; for after-death distributions, see Q 3687. Reporting requirements pertaining to IRA required minimum distributions are explained in Q 3597.

      Roth IRAs are not subject to the lifetime minimum distribution requirements, but are subject to the after-death distribution requirements explained in Q 3687.

      Traditional IRAs, SEP IRAs, and SIMPLE IRAs (non-Roth IRAs) generally are subject to the same minimum distribution requirements that apply to qualified plans, with some variations (Q 3892 to Q 3900).[2] The required beginning date for lifetime distributions from non-Roth IRAs is April 1 of the calendar year following the calendar year in which the individual attains age 72 (70½ prior to 2020) ( Q 3686).[3] Under pre-SECURE Act law, an individual reached age 70½ on the date that is six calendar months after his or her 70th birthday.[4]


      Planning Point: The 2020 CARES Act waived RMDs from IRAs and other defined contribution plans for calendar year 2020. The five-year rule is also determined without regard to 2020.

      While the CARES Act waived all RMDs for 2020, the law was enacted after some taxpayers had already taken their 2020 RMDs early in the year.  For those who took RMDs very early in the year, the sixty-day rollover period had already expired.  In response, the IRS announced that anyone who took a 2020 RMD was eligible to roll the funds back into their account penalty-free.  The sixty-day rollover period was extended through August 31, 2020.  Further, the rollover does not count toward the otherwise applicable “one rollover per twelve-month period” rule or the restriction on rollovers for inherited IRAs. [5]


      [1].    IRC Secs. 408(a)(6), 408(b)(3), 401(a)(9).

      [2].    Treas. Reg. §1.408-8, A-1, A-2.

      [3].    Treas. Reg. §1.408-8, A-3.

      [4].    Treas. Reg. §1.401(a)(9)-2, A-3.

      [5].    Notice 2020-51.

  • 3683. What can be done before the IRA required beginning date in order to minimize required minimum distributions?

    • The required minimum distribution (RMD) rules essentially require taxpayers to begin withdrawing funds from IRAs when they reach age 72. The minimum amounts that must be withdrawn are calculated based on the account value and the taxpayer’s life expectancy, determined using IRS actuarial data.1 Despite this, there are ways that individuals can minimize their RMDs in the years prior to attaining age 72 if they will have no immediate need for the funds at that time.

      Many individuals can to reduce their RMDs by converting a portion of their traditional IRA funds into Roth funds. Roth IRAs have no minimum distribution requirements, so converting traditional IRA funds to Roth accounts will reduce the owner’s RMDs. Unfortunately, if the taxpayer is still working, the taxpayer may still be in a high enough income tax bracket that the taxes generated by the rollover can be substantial (all amounts rolled over from a traditional IRA to a Roth IRA are taxed at the owner’s ordinary income tax rate).

      If the individual is still working, the taxpayer can also consider rolling the funds into a qualified plan (such as a profit-sharing or 401(k) plan) where distributions are not required until the later of the year the taxpayer turns 72 or the year the taxpayer retires. In this case, it becomes important that the taxpayer learn the rules of the qualified plan before making the rollover. Some plans do not accept rollovers, and others require that distributions begin at 72 regardless of the option to postpone until retirement.

      Importantly, both of these rollover moves must be made before the RMD requirements kick in—otherwise the individual will have to pay both the taxes associated with the RMD (which cannot be rolled over) and those generated by the rollover itself.2

      A taxpayer can also reduce RMDs by purchasing a qualified longevity annuity contract (QLAC, see Q 558)—which is a relatively new annuity product that is purchased within the IRA, deferring annuity payouts until the taxpayer reaches old age. The value of the QLAC is excluded from the account value when calculating the RMDs, though the taxpayer is limited to purchasing a QLAC with an annuity premium value equal to the lesser of 25 percent of the account value or $130,000 (in 2020 and 2021, up from $130,000 in 2019).3


      1. Treas. Reg. §1.408-8.

      2. Treas. Reg. §1.408-8.

      3. IRC Sec. 401(a)(9); Treas. Reg. §1.401(a)(9)-6.

  • 3684. How are minimum distribution requirements calculated if an individual owns more than one IRA?

    • If an individual owns more than one IRA, the required minimum distribution (RMD) must be calculated separately for each IRA, but the total for a category (Roth or non-Roth) may be taken from any one or more of the IRAs within the same category. This rule requires aggregation of amounts that an individual is required to take as the IRA owner and a separate aggregation for amounts that an individual is required to take as the designated beneficiary of a decedent’s IRA. Amounts taken as an IRA owner may not be aggregated with amounts taken as a beneficiary for purposes of meeting the minimum distribution requirements. Similarly, distributions from 403(b) contracts or annuities may not be aggregated with IRA distributions to meet the distribution requirements for either type of account.1

      Example: Mark, who is 73 years old, has two IRA accounts that he contributed to during his working years and an IRA that he inherited from his deceased father. One of his IRA balances equals $50,000 (IRA 1) and the other equals $75,000 (IRA 2); the inherited IRA has a balance of $25,000. Mark’s required minimum distribution from these accounts is as follows:

      IRA 1 = $1887

      IRA 2 = $2830

      Inherited IRA = $943.

      Mark must take, in total, $4717 ($1887+ 2830) from his IRAs. But he could take this amount from either IRA 1 or IRA 2 (or a combination of the two). The $943 required from the inherited IRA, however, must be taken only from that account.

      When an RMD is required during a calendar year, any amount distributed or withdrawn from the account will first be treated as the required distribution amount until the total required distribution has been satisfied. Consequently, such a distribution is not eligible for rollover.2 However, the minimum distribution requirement may be satisfied by a distribution from another IRA owned by the same individual.3


      Planning Point: Clients with multiple accounts may be required to take more than one distribution from these accounts.  In other words, not all RMDs can be aggregated and taken from any account.  Failure to take the correct RMD from the correct account can expose the client to significant tax liability.  When calculating RMDs, IRAs (including SEP and SIMPLE accounts) are calculated separately, but the total RMD can be taken from any IRA.  Company-sponsored 401(k)s must be calculated separately for each plan and the RMD must be taken separately from each specific 401(k) account.  RMDs for 403(b) plans must be calculated separately and the total RMD for all 403(b) plans can be taken from any one or more of the 403(b) plans.


      In the event of a transfer from one IRA to another, the transferor IRA must distribute any amount required under these minimum distribution rules in the year of transfer—i.e. the transfer itself will not count as a distribution that satisfies these minimum distribution rules.4


      1. Treas. Reg. §1.408-8, A-9.

      2. Treas. Reg. §1.408-8, A-4.

      3. Treas. Reg. §1.408-8, A-9.

      4. Treas. Reg. §1.408-8, A-8.

  • 3685. Is there a penalty imposed for failure to comply with IRA required minimum distribution requirements?

    • A penalty tax is imposed on the participant (IRA owner) if the amount distributed under an IRA for a calendar year is less than the required minimum distribution for the year. The penalty is equal to 50 percent of the amount by which the distribution made in the calendar year falls short of the required amount.1 The penalty generally will be imposed in the calendar year in which the amount was required to be distributed. If the distribution was the first required distribution, and thus was due by April 1 following the calendar year in which the IRA owner reached 72 years old (the required beginning date), the penalty will be imposed in the calendar year when distributions were to begin even though the required distribution was technically for the preceding year.2

      Example: Joan turned 72 on October 26 of 2021. Her first required minimum distribution for 2021 was due by April 1, 2022. Joan did not receive such amount by the April 1 due date. Consequently, Joan will owe a penalty equal to 50 percent of the amount that should have been distributed, which will be imposed on her 2022 tax return. Note that RMDs were waived for 2020 only.

      The penalty tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.3

      The minimum distribution requirements will not be treated as violated, and, the 50 percent excise tax will not apply, where a shortfall occurs because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings.4

      Planning Point: To request a waiver of all or part of the 50 percent penalty tax imposed on RMD amounts not distributed on time, a statement of explanation should be filed with Form 5329 for each tax year there is or was a failure to properly take RMDs. The letter must explain the “reasonable error” that caused the failure and the reasonable steps that were taken to correct the error. Although the IRS has not issued guidance on what is a “reasonable error,” possible examples may include illness, death in the family, and notification of RMD not received from the financial institution.


      1. IRC Sec. 4974(a); Treas. Reg. §54.4974-1.

      2. Treas. Reg. §§54.4974-2, A-1, 54.4974-2, A-6.

      3. IRC Sec. 4974; Treas. Reg. §54.4974-2, A-7(a).

      4. Treas. Reg. §1.401(a)(9)-8, A-8.

  • 3686. How are the minimum distribution requirements met during an IRA owner’s lifetime?

    • Distributions from a non-Roth Individual Retirement Account (“IRA”) or annuity must begin by April 1 of the year after the year in which the owner reaches age 72, whether or not the owner has retired.[1] Non-Roth IRA owners working beyond age 72 are not permitted to delay distributions until after retirement, even under an employer-sponsored plan such as a SEP or SIMPLE IRA. Unless the owner’s entire interest is distributed on or before the required beginning date, distributions of the balance must begin by that date and must, at a minimum, be distributed over the time period explained below.

      No minimum distribution is required during life from a Roth IRA.


      Planning Point: RMDs were waived for 2020 only under the CARES Act.


      Uniform Lifetime Table

      Required minimum distributions from a non-Roth IRA during the owner’s lifetime are calculated by dividing the owner’s account balance by the applicable distribution period determined from the RMD Uniform Lifetime Table found in Appendix F.[2] The amount of an individual’s lifetime required distribution is calculated without regard to the beneficiary’s age, except in the case of a spouse who is the sole beneficiary and who is more than ten years younger than the owner.[3]


      Planning Point: The IRS released new proposed life expectancy tables that would be used in calculating required minimum distributions from both IRAs and employer-sponsored retirement plans. The new tables generally assume longer life expectancies and provide information needed to calculate RMDs for participants living to 120 (the previous tables stop at 115). For most clients, the primary impact will be seen in lower required distributions (beginning in 2021, RMDs for 2020 were waived and the IRS delayed applicability of the new tables to give plan recordkeepers more time to make the administrative changes needed to implement the new tables.).

      Starting in 2022, savers who have reached age 72 will now use the updated life expectancy tables.  For many clients, the new tables mean that RMDs will be slightly smaller beginning in 2022.

      The new factor for clients aged 70 is 29.1 (up from 27.4) and for clients who are age 71, the factor increases to 28.2 (up from 26.5). Individuals taking RMDs from inherited accounts will also be entitled to switch to the new life expectancy tables, as will those clients currently receiving substantially equal periodic payments.

      The new rules also provide a transition rule for beneficiaries of account owners who died before January 1, 2022. Under the rule, the initial life expectancy used to determine the distribution period is reset by using the new single life table. The transition rule can apply if the account owner died: (1) with a non-spouse eligible designated beneficiary, (2) after the required beginning date (RBD) and without a designated beneficiary or (3) after the RBD if the original owner was younger than the designated beneficiary.[4]


      The distribution required by April 1 is actually the distribution required for the year in which the owner attains age 72. Distributions for each calendar year after the year the owner becomes age 72 (including the year of the required beginning date) must be made by December 31 of that year.[5]

      For purposes of calculating minimum distributions from an IRA for a calendar year, the account balance is determined as of December 31 of the immediately preceding calendar year (i.e., the valuation calendar year).[6]

      Example: Ms. Getman is an IRA owner born on July 1, 1949. She reached age 72 on July 1, 2021.  Consequently, Ms. Getman’s required beginning date is April 1, 2022 (the year following the calendar year in which she turned 72). Assume that as of December 31, 2020, the value of Ms. Getman’s IRA was $265,000. Because Ms. Getman’s age in 2021 (the year for which her first distribution will be made) is 72, the applicable distribution period from the Uniform Lifetime Table is 25.6 years. Thus, the required distribution for calendar year 2021 is $10,352 ($265,000 ÷ 25.6). Assume that Ms. Getman receives this amount in 2022 shortly before her required beginning date of April 1, 2022.

      Assume that the value of Ms. Getman’s account balance as of December 31, 2021 is $254,648. This account balance is not reduced by the distribution received in early 2022. As a result, Ms. Getman’s required minimum distribution for 2022 (when she is 73), which is due by December 31, 2022, would be $10,309.64 ($254,648 ÷ 24.7). Receiving a distribution of more than the required minimum will not reduce the amount Ms. Getman is required to take in a subsequent year.[7]

      Spouse Beneficiary

      If the IRA owner’s spouse is the only designated beneficiary of the owner’s entire interest at all times during the distribution year, the owner may receive distributions over the longer of the distribution period determined from the Uniform Lifetime Table or the joint and survivor life expectancy of the owner and spouse.[8] The joint and survivor life expectancy will provide a longer payout period only if the spouse is more than ten years younger than the IRA owner. For details on the definition of “designated beneficiary,” see Q 3696.

      Charitable IRA Rollover

      For tax years beginning in 2006 and thereafter, an IRA owner’s required minimum distribution can be reduced, within limits, by the amount of a qualified charitable distribution of up to $100,000, transferred directly from the taxpayer’s IRA to a qualified charity.[9] This provision does not apply to SEP IRAs or SIMPLE IRAs (Q 3996). This charitable rollover provision was made permanent by the Protecting Americans Against Tax Hikes Act of 2015 (PATH Act).

      Distributions as Annuity Payments

      IRA required minimum distributions that are made as annuity payments are calculated in the same manner as required minimum distributions from defined benefit plans (Q 3896).[10]

       

      [1].     Treas. Reg. §1.408-8, A-3.

      [2].     Treas. Reg. §1.401(a)(9)-9, A-2.

      [3].     Treas. Reg. §1.401(a)(9)-5, A-4.

      [4]      Treas. Reg. §1.401(a)(9)-9(f).

      [5].     Treas. Reg. §1.401(a)(9)-5, A-1(b).

      [6].     Treas. Reg. §1.408-8, A-6.

      [7].     Treas. Reg. §§1.408-8, A-6, 1.401(a)(9)-5, A-3.

      [8].     Treas. Reg. §1.401(a)(9)-5, A-4(b).

      [9].     IRC Sec. 408(d)(8).

      [10].   Treas. Reg. §§1.408-8, A-1, 1.401(a)(9)-6.

  • 3687. How are the minimum distribution requirements met after the death of an IRA owner?

    • Editor’s Note: See Q 3691 for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries.  The rules below apply to tax years beginning before 2020.

      Prior to 202, the minimum distribution requirements that applied after the death of an IRA owner depended on whether the IRA owner died before (see Q 3688) or after (see Q 3689) the required beginning date.

      Distributions generally were treated as having begun in accordance with the minimum distribution requirements under IRC Section 401(a)(9)(A)(ii). If distributions irrevocably (except for acceleration) began prior to the required beginning date in the form of an annuity that meets the minimum distribution rules, the annuity starting date would be treated as the required beginning date for purposes of calculating lifetime and after death minimum distribution requirements.1


      1. Treas. Reg. §1.401(a)(9)-6, A-10; Treas. Reg. §1.408-8, A-1.

  • 3688. How are the minimum distribution requirements met when an IRA owner dies before the required beginning date?

    • Editor’s Note: See Q 3691 for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries.  The rules below apply to IRAs whose owners died in tax years beginning before 2020.  Beginning in 2020, most non-spouse beneficiaries will be required to deplete the account value within ten years of the original owner’s death.

      Pre-SECURE Act Rules

      If an IRA owner dies before the required beginning date, distributions must be made under either a life expectancy method or the five year rule.1 After-death distributions from a Roth IRA will also be determined under these rules because the Roth IRA owner is treated as having died before the required beginning date.2

      Life Expectancy Method

      Under the life expectancy rule, if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life (or life expectancy) of the designated beneficiary (Q 3696).3

      To the extent that the interest is payable to a nonspouse beneficiary, distributions must begin by December 31 of the calendar year immediately following the year in which the IRA owner died.4 The nonspouse beneficiary’s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the owner’s death and is determined using the Single Life Table (see Appendix F – 01).5 In subsequent years, this amount is reduced by one for each calendar year that has elapsed since the year of the owner’s death.6 After the death of a nonspouse beneficiary, the payout period to the successor beneficiary will be determined using the deceased beneficiary’s remaining life expectancy (based on the age of the beneficiary in the calendar year of death) reduced by one for each calendar year that elapses thereafter.7

      For the treatment of multiple beneficiaries, see Q 3696.

      Planning Point: The term “stretch IRA” does not appear in the Internal Revenue Code, but describes the practice of IRA distribution planning that successfully permits the beneficiaries (e.g., a surviving spouse and a child of the owner) to receive (or “stretch”) distributions over their individual life expectancies under the foregoing rules.

      Prior to the SECURE Act’s change, a younger beneficiary allowed for greater stretching given the longer life expectancy. When there are multiple beneficiaries, separate account rules must be followed for each designated beneficiary to use his or her own life expectancy for calculating RMDs.

      A surviving spouse who is the sole designated beneficiary of an IRA generally may elect to treat the IRA as his or her own (see Q 3690). Unless this election is made, distributions to a surviving spouse beneficiary must begin by the later of the end of the calendar year immediately following the calendar year in which the owner died, or the end of the calendar year in which the owner would have reached age 70½.8 The payout period is the surviving spouse’s life expectancy, based on his or her attained age in each calendar year for which a minimum distribution is required.9 After the surviving spouse dies, the payout period is that spouse’s remaining life expectancy, based on the age of the spouse in the calendar year of death, reduced by one for each calendar year that elapses thereafter.10

      A designated beneficiary who does not elect the five year method but fails to timely start distributions under the life expectancy method may be able to make up the missed RMDs and pay the 50 percent penalty on the missed distributions, rather than receive the entire balance within five years.11

      Five Year Method

      Under the five year rule, the entire interest must be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).12 To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the IRA owner’s death.13

      Planning Point: The five year period was expanded to six years if 2009 was one of the five years.14


      1. Treas. Reg. §1.401(a)(9)-3, A-1(a).

      2. Treas. Reg. §1.408A-6, A-14(b).

      3. IRC Sec. 401(a)(9)(B)(iii), Treas. Reg. §1.401(a)(9)-3, A-1(a).

      4. Treas. Reg. §1.401(a)(9)-3, A-3.

      5. Treas. Reg. §1.401(a)(9)-9.

      6. Treas. Reg. §1.401(a)(9)-5, A-5(c)(1).

      7. Treas. Reg. §1.401(a)(9)-5, A-7(c)(2).

      8. IRC Sec. 401(a)(9)(B)(iv); Treas. Reg. §1.401(a)(9)-3, A-3.

      9. Treas. Reg. §1.401(a)(9)-5, A-5(c)(2).

      10. Treas. Reg. §1.401(a)(9)-5, A-5(c)(2).

      11. Let. Rul. 200811028.

      12. IRC Sec. 401(a)(9)(B)(ii); Treas. Reg. §1.401(a)(9)-3, A-1(a).

      13. Treas. Reg. §1.401(a)(9)-3, A-2.

      14. IRC Sec. 401(a)(9)(H)(ii).

  • 3689. How are the minimum distribution requirements met when an IRA owner dies on or after the required beginning date?

    • Editor’s Note: See Q 3691 for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries.  The rules below apply to IRAs whose owners died in tax years beginning before 2020.

      Prior to 2020, if the owner of an IRA died on or after the date minimum distributions have begun (i.e., the required beginning date), but before the entire interest in the IRA has been distributed, the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect at the owner’s date of death.1

      If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (the “determination date;” i.e., September 30th of the year after death, see Q 3696), the IRA owner’s interest was distributed over his or her remaining life expectancy, using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.2

      If the owner does have a designated beneficiary as of the determination date, the beneficiary’s interest was distributed over the longer of (1) the beneficiary’s life expectancy, calculated as described under the “Life Expectancy Method,” in Q 3688 or (2) the remaining life expectancy of the owner, determined using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.3

      For the treatment of multiple beneficiaries and separate accounts, see Q 3696.


      1. IRC Sec. 401(a)(9)(B)(i).

      2. Treas. Reg. §1.401(a)(9)-5, A-5(c)(3).

      3. Treas. Reg. §1.401(a)(9)-5, A-5(c)(3); Treas. Reg. §1.401(a)(9)-5, A-5(a)(1).

  • 3690. What distribution requirements apply to an IRA that is inherited by a surviving spouse?

    • Editor’s Note: See Q 3691 for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries.

      While a surviving spouse may elect to treat an inherited IRA in the same manner as a non-spousal beneficiary (see Q 3691), a surviving spouse of an IRA owner who is the sole beneficiary of an IRA and who has an unlimited right to make withdrawals from the IRA may also elect to treat the entire account as his or her own IRA. This election can be made at any time after the IRA owner’s death.Post-SECURE Act, surviving spouses qualify as eligible designated beneficiaries (EDBs), so the pre-SECURE Act distribution rules continue to apply.

      Any minimum distribution that was required to be made to the deceased owner, but had not been made before the owner’s death, must be made to the surviving spouse in the year of death, but in all other respects, required distributions after the owner’s death are determined as if the surviving spouse were the owner.2

      The surviving spouse will be deemed to have made the election to treat the IRA as his or her own if any required amounts in the account have not been distributed under the requirements for after-death required minimum distributions, or any additional amounts are contributed to the account or to an account or annuity to which the surviving spouse has rolled over the amounts.3

      The result of a surviving spouse making the election to treat an IRA as his or her own is that the surviving spouse then will be considered the IRA owner for all other income tax purposes (for example, for purposes of the 10 percent penalty on early distributions).4

      In the event that a surviving spouse beneficiary dies after the IRA owner, but before distributions to the spouse have begun, the 10-year-rule, five-year rule and the life expectancy rule described in Q 3688 and Q 3691 will be applied as though the surviving spouse were the IRA owner.5 As a result, the distribution period is determined depending upon the identity of the surviving spouse’s designated beneficiary, determined as of the date of the the surviving spouse’s death.6 This provision does not allow a new spouse of the deceased IRA owner’s surviving spouse to delay distributions under the surviving spouse rules of IRC 401(a)(9)(B)(iv).7

      Planning Point: A surviving spouse who is younger than 59½ years old and needs money should consider remaining a named beneficiary of the inherited IRA. As a named beneficiary, the surviving spouse can access the inherited IRA without incurring penalties –as compared to rolling the account into the spouse’s own IRA, where a distribution prior to 59½ could be subject to the 10 percent penalty.

      A surviving spouse who is younger than 72 years old and does not need money from the IRA should consider rolling the money into the spouse’s own IRA to delay RMDs until the spouse is 72, which allows the account to continue growing tax-deferred.


      1. Treas. Reg. §1.408-8, A-5(a).

      2. Treas. Reg. §1.408-8, A-5(a).

      3. Treas. Reg. §1.408-8, A-5(b).

      4. Treas. Reg. §1.408-8, A-5(c); see Gee v. Comm., 127 TC 1 (2006).

      5. IRC Sec. 401(a)(9)(B)(iv)(II); Treas. Reg. §1.401(a)(9)-4, A-4(b); see Let. Rul. 200436017.

      6. Treas. Reg. §1.401(a)(9)-4,A-4(b).

      7. Treas. Reg. §1.401(a)(9)-4,A-4(b).

  • 3691. What distribution requirements apply to an inherited IRA where the beneficiary is not the surviving spouse?

    • Editor’s Note: The IRS’ revised Publication 590-B included a surprise interpretation for inherited IRA beneficiaries who are now subject to the SECURE Act’s 10-year rule.  Under the 10-year rule, inherited IRA balances must be depleted within the first 10 years after the original account owner’s death unless the beneficiary is an eligible designated beneficiary.  Most expected the new “10-year rule” would be interpreted in the same manner as the old “five-year rule”, meaning that RMDs would not be required each year during the 10-year period.  In one revision, however, the IRS indicated that the beneficiary would be required to take a distribution each year during the 10-year period. IRS officials have since announced that the revisions were incorrect–and that a revised Publication 590-B will make it clear that inherited IRA beneficiaries have 10 years to deplete the account funds in whatever way they choose–whether via annual distributions, a lump sum distribution in year 10 or a combination of the two.

      Distribution requirements for an inherited IRA for a nonspouse beneficiary will depend on whether the IRA owner died before, on or after the required beginning date. The SECURE Act made substantial changes that eliminate the “life expectancy method” and “five-year method”, discussed under the heading below, for most account beneficiaries.  Under the new law, most non-spouse account beneficiaries will be required to take distributions over a ten-year period following the original account owner’s death (the ten-year rule).

      The law did not change the rules applicable to surviving spouses who inherit retirement accounts.  Exceptions also exist for disabled beneficiaries, chronically ill beneficiaries and children who have not reached “the age of majority”.  A child who inherits may not be treated as reaching the age of majority (even upon reaching age 18 or 21) if that child has not completed a specified course of education (further guidance is expected as to what exactly qualifies as a “specified course of education”).  A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary.  The new ten-year rule also does not apply to an account beneficiary who is not more than ten years younger than the original account owner.

      The new rule applies for tax years beginning after December 31, 2019 and applies to all defined contribution-type plans (the rules governing distributions from Roth IRAs were not changed).

      Pre-SECURE Act Law: Death Before Required Beginning Date

      Prior to 2020, if an IRA owner died before the required beginning date, distributions must be made under either a life expectancy method or the five-year rule (Q 3686).[1] After-death distributions from a Roth IRA also will be determined under these rules because the Roth IRA owner is treated as having died before the required beginning date.[2]


      Planning Point: The CARES Act provided relief to IRA owners by eliminating the need to take 2020 RMDs.  This relief also extends to beneficiaries of inherited accounts.  For account beneficiaries subject to the five-year rule, the CARES Act provides that if 2020 is one of those five years, it is not counted–essentially extending the distribution period to six years.


      Under the life expectancy rule, if any portion of the interest was payable to, or for the benefit of, a designated beneficiary, that portion could be distributed over the life (or life expectancy) of the designated beneficiary, beginning within one year of the owner’s death.[3] To the extent that the interest is payable to a nonspouse beneficiary, distributions had to begin by the end of the calendar year immediately following the calendar year in which the IRA owner died.[4] The nonspouse beneficiary’s life expectancy for this purpose was measured as of the beneficiary’s birthday in the year following the year of the owner’s death. In subsequent years, this amount was reduced by one for each calendar year that has elapsed since the year of the owner’s death.[5]

      A person who wishes to use the life expectancy method and failed to timely start distributions could make up the missed RMDs and pay the 50 percent penalty on the missed distributions.[6]

      Under the five-year rule, the entire interest had to be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).[7] To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the IRA owner’s death.[8]

      Pre-SECURE Act Law: Death On or After Required Beginning Date

      If the owner of an IRA dies on or after the date distributions have begun (i.e., generally the required beginning date), but before the entire interest in the IRA has been distributed, the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect as of the owner’s date of death (Q 3687).[9]

      If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (i.e., September 30 of the year after death) the IRA owner’s interest is distributed over the remaining life expectancy, using the age of the owner in the calendar year of death, reduced by one for each calendar year that elapses thereafter.[10]

      If the owner does have a designated beneficiary as of the determination date, the beneficiary’s interest is distributed over the longer of (1) the beneficiary’s life expectancy, calculated as described in Q 3686[11] or (2) the remaining life expectancy of the owner, determined using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.[12]

      See Q 3688 for the treatment of an IRA that is inherited by a surviving spouse.

       

      [1].      Treas. Reg. §1.401(a)(9)-3, A-1(a).

      [2].      Treas. Reg. §1.408A-6, A-14(b).

      [3].      IRC Sec. 401(a)(9)(B)(iii), Treas. Reg. §1.401(a)(9)-3, A-1(a).

      [4].      Treas. Reg. §1.401(a)(9)-3, A-3.

      [5].      Treas. Reg. §1.401(a)(9)-5, A-5(c)(1).

      [6].      Let. Rul. 200811028.

      [7].      IRC Sec. 401(a)(9)(B)(ii); Treas. Reg. §1.401(a)(9)-3, A-1(a).

      [8].      Treas. Reg. §1.401(a)(9)-3, A-2.

      [9].      IRC Sec. 401(a)(9)(B)(i).

      [10].    Treas. Reg. §1.401(a)(9)-5, A-5(c)(3).

      [11].    Treas. Reg. §1.401(a)(9)-5, A-5(c)(1), (2).

      [12].    Treas. Reg. §§1.401(a)(9)-5, A-5(c)(3); 1.401(a)(9)-5, A-5(a)(1).

  • 3692. How can an IRA be used to stretch the tax benefits of funds held within an inherited 401(k) over a beneficiary's lifetime prior to 2020?

    • Editor’s Note: Beginning in 2020, most inherited IRAs inherited by non-spouse beneficiaries must be depleted within ten years of the original account owner’s death under the SECURE Act.

      Inherited IRAs generally allowed an individual to “stretch” the tax-deferral associated with these accounts by providing for distribution of the account value over a period of years following the original account owner’s death. Typically, the account beneficiary will take distributions over his or her lifetime or exhaust the account funds within five years of the original owner’s death, which allows the account value to continue to grow and stretches the tax liability that accompanies the distributions over a period of years.1 See Q 3687 to Q 3689 for a discussion of the distribution rules that apply following the original account owner’s death.

      Qualified plans (such as 401(k)s and profit-sharing plans), however, have always been subject to a different set of rules that do not allow the funds to be distributed over time. As a result, when a 401(k) is inherited, the funds will usually be distributed immediately in a single lump sum payment, resulting in an immediate tax liability for the beneficiary.

      If the designated beneficiary of an inherited 401(k) is an individual, prior to 2020, he or she had the option of rolling the inherited account funds into an IRA that would be treated as an inherited IRA, thus allowing the individual to stretch distributions over his or her life expectancy (or over a five-year period). The rollover had to be accomplished through a trustee-to-trustee transfer whereby the 401(k) plan administrator transfers the funds directly into a new IRA account that only holds the inherited 401(k) funds.

      If the original account owner has failed to name a beneficiary, the IRA will likely be paid out to his or her estate upon death—which will cause a loss of the tax-deferral benefits that can otherwise be realized with an inherited IRA. This is because the favorable rules that allow the account value to be distributed over time only apply if the account’s designated beneficiary is an individual (or a trust, the beneficiary of which is an individual) that actually has a life expectancy.2

      Further, if the estate is the beneficiary of an inherited qualified plan (401(k)), the taxpayer loses the option of rolling the funds into an inherited IRA in order to maximize the tax-deferral potential.


      1. See Treas. Reg. §1.401(a)(9)-6; Treas. Reg. §1.408-8.

      2. See Treas. Reg. §1.401(a)(9)-4.

  • 3693. What is the difference between a spousal inherited IRA and a nonspousal inherited IRA? What do taxpayers need to be aware of with respect to the differences between these types of accounts?

    • The primary difference between a spousal inherited IRA and a non-spousal inherited IRA lies in the requirements that apply with respect to required minimum distributions (RMDs) after the original account owner’s death. A spouse who inherits his or her deceased spouse’s IRA is essentially entitled to treat the IRA as though it was the surviving spouse’s own IRA.1 This can potentially allow a younger beneficiary to delay taking RMDs until that individual reaches age 72.

      A non-spouse IRA beneficiary will be required to close the account within 10 years, or use the beneficiary’s life expectancy if the beneficiary qualifies as an eligible designated beneficiary under the SECURE Act rules. Non-spouse beneficiaries subject to the 10-year rule are not required to take distributions every year. But depending on the tax bracket of the beneficiary that may be wise to ensure the beneficiary is not put into a higher tax bracket if a large lump sum is taken in the tenth year.

      Unlike in the case of an IRA that is inherited by a surviving spouse, non-spouse beneficiaries of inherited accounts are not entitled to complete sixty-day tax-free rollovers to another account, so that the only way of moving the funds without the entire amount being deemed a taxable transaction is through a trustee-to-trustee transfer. The account to which the funds are moved must be properly titled, with an indication that the account is an inherited account, and both the names of the original owner and beneficiary.

      If multiple beneficiaries exist, the account should first be split into separate accounts so that each beneficiary’s distributions can be determined based on the beneficiary’s status.

      __________________

      1. Treas. Reg. §1.408-8, A-5(a).

  • 3694. What differences exist between the treatment of inherited IRAs and inherited 401(k)s?

    • While inherited IRAs often may be distributed over time (potentially spreading the associated tax liability over ten years or the beneficiary’s lifetime), qualified plans (such as 401(k)s and profit sharing plans) are subject to a different set of rules that do not allow the funds to be distributed over time. As a result, when a taxpayer inherits a 401(k), the funds typically must be distributed immediately in a single lump sum payment, resulting in an immediate tax liability for the beneficiary. Most plans will specifically require lump sum distribution treatment because of the administrative burdens associated with allowing stretched out distributions.

      Despite this, certain beneficiaries can roll those funds into an inherited IRA. Once the funds are in the inherited IRA, they must be distributed according to the same rules that govern inherited IRAs. While this option is now generally mandatory (under IRC Section 402; prior to 2010, a plan only had the option of allowing an inherited 401(k)-to-inherited IRA rollover), not all beneficiaries are eligible to roll inherited 401(k) funds into an inherited IRA.

      Note that after 2020, once rolled into an IRA, the funds must be withdrawn within ten years unless the beneficiary is an eligible designated beneficiary.

      Only a designated beneficiary is entitled to take advantage of the option of rolling the inherited 401(k) funds into an inherited IRA. A designated beneficiary for this purpose means an individual, or certain trusts that qualify as “see through” or “look through” trusts. This means that the trust is an irrevocable trust that is valid under state law and identifies the beneficiaries of the trust as individuals (the trustee also must provide a copy of the trust document). The rollover must be accomplished in a trustee-to-trustee transfer (i.e., directly between the relevant financial institutions).

      Planning Point: Estates and other trusts that inherit a 401(k) are generally not designated beneficiaries for purposes of the distribution rules, so their distribution rights will be limited to those provided in the plan document itself.

  • 3695. Are inherited IRA funds exempt from the claims of a taxpayer’s creditors in bankruptcy?

    • Whether or not the funds in an inherited IRA are exempt from the claims of a taxpayer’s creditors in bankruptcy has been an issue that many have disagreed upon in the past, but that the Supreme Court resolved in 2014.1 Under current law, the funds in an inherited IRA are subject to the claims of a beneficiary-debtor’s creditors in bankruptcy if the account is inherited by abeneficiary who is not the original account owner’s surviving spouse.

      Traditional and Roth IRAs that are not inherited accounts are typically exempt from bankruptcy claims up to an inflation-adjusted $1 million limit (which is adjusted every three years; the new exemption, updated April 1, 2022, is $1,512,350, and between April 1, 2019, and April 1, 2022, the exemption was $1,362,800) (Q 3653).2

      Prior to the Supreme Court’s review of the issue, in some jurisdictions (the Eighth Circuit, for example), inherited IRAs were exempt from bankruptcy claims based on the premise that the funds are retirement funds contained in otherwise tax-exempt vehicles. However, other courts had held that inherited IRAs lack the requisite retirement purpose. The rationale behind this line of decisions (most prominently found in the Seventh Circuit) was that inherited IRAs are subject to an entirely different set of rules than IRAs held by their original owners.

      Importantly, while a penalty is imposed on any non-inherited IRA funds that are withdrawn by the owner prior to a certain age, inherited IRA assets are liquid assets that can be accessed by the beneficiary at any time and without penalty. Further, the rules actually require that the inherited IRA funds be withdrawn within a relatively short time frame (either within five years, ten years or over the beneficiary’s life expectancy, see Q 3690 and Q 3691) set without regard to the typical retirement age.

      This split among the circuits prompted the Supreme Court’s review of the issue. Though the rule is now settled with respect to nonspouse beneficiaries, taxpayers should note that the Supreme Court decision did not specifically address the issue of IRAs that are inherited by a surviving spouse (see Q 3690).

      Planning Point: To provide beneficiaries of an inherited IRA with creditor protection, an IRA owner should consider naming a trust (or trusts) as a beneficiary of the IRA. In order to preserve the “stretch” options (Q 3688), a “see-through” trust should be used (Q 3907).


      1Clark v. Rameker, 134 S. Ct. 2242 (2014).

      2. 11 U.S.C. §522.

  • 3696. Who is a “designated beneficiary” for purposes of required minimum distributions from an IRA?

    • A designated beneficiary is an individual (or a trust meeting certain requirements, see Q 3904) designated as a beneficiary, either by the terms of the IRA plan document or by an affirmative election of the IRA owner (or such owner’s surviving spouse).1

      The designated beneficiary need not be specified by name to be a designated beneficiary so long as that beneficiary is identifiable under the terms of the IRA as of the determination date.2 For special rules governing contingent and successor beneficiaries, see Q 3904.

      For lifetime distributions, the identity and age of the designated beneficiary does not affect the IRA owner’s distributions unless the sole designated beneficiary is a spouse more than ten years younger than the owner (Q 3686). After 2020, the beneficiary’s status is determined as of the date of death.

      Under pre-2020 law, for purposes of after-death minimum distribution requirements, the final regulations required that a beneficiary determination be made as of September 30 of the year after the year of the IRA owner’s death (i.e., the determination date).3 This date was designed to provide ample time following the determination of the designated beneficiary(ies) to calculate and make the required distribution prior to the distribution deadline (i.e., the end of the calendar year following the owner’s death).4 Exceptions to the September 30 deadline applied if the account was payable as an annuity, or if a surviving spouse beneficiary died after the IRA owner but before distributions had begun.

      An individual who was a beneficiary as of the date of the owner’s death, but who is not a beneficiary as of September 30 of the following year (e.g., because the individual disclaims entitlement to the benefit or because the individual receives the entire benefit to which the individual is entitled before that date) is not taken into account for purposes of determining the distribution period for required minimum distributions after the owner’s death.5

      A disclaiming beneficiary’s receipt of a required distribution, prior to disclaiming the benefit, in the year after death, will not result in the beneficiary being treated as a designated beneficiary for subsequent years.6 In a private letter ruling, the IRS also determined that a post death reformation of a beneficiary designation form that had inadvertently excluded a decedent’s children was effective to create a “designated beneficiary.”7 The children had been omitted as contingent beneficiaries on their father’s beneficiary designation due to a mistake by a bank employee, and not due to their fault. The children were therefore allowed to set up inherited IRAs after their father’s death.

      If a beneficiary is not an individual or a permitted trust, the IRA owner will be treated as having no designated beneficiary and the five year rule will apply (Q 3688). An IRA owner’s estate may not be a designated beneficiary.8 This rule continues to apply even after the SECURE Act became effective in 2020.

      General, only an individual (not an estate or a trust) may be a designated beneficiary for required minimum distribution purposes. For example, if an IRA owner fails to name a beneficiary on the beneficiary designation form and the IRA plan document provides that in such a case benefits are paid to the owner’s estate, the estate beneficiaries will be barred from using the ten-year or life expectancy method and the five year rule will apply.9 However, when a trust is named as a beneficiary and the special requirements for a “see-through” trust are met (Q 3907), the beneficiaries of a trust may be treated as if they had been designated as the beneficiaries of the IRA for required minimum distribution purposes (but not for purposes of “separate account treatment,” see Q 3697).

      In general, a valid see-through trust must satisfy the following four requirements: (1) the trust must be valid under state law, (2) the trust must be irrevocable, or must become irrevocable upon the death of the original account owner, (3) the beneficiaries of the trust who are to be beneficiaries of the IRA must be identifiable from the trust instrument itself, and (4) relevant documentation must have been provided to the plan administrator in a timely manner.10 In this case, the life expectancy of the oldest of all trust beneficiaries will be used to determine the minimum distribution requirements that apply after the death of the original account owner.11

      PlanningPoint: Prior to 2020, when multiple beneficiaries are involved, there may have been a benefit to establishing separate accounts (Q 3697), when available, or removing certain beneficiaries (via a disclaimer or lump sum distribution) between the date of the owner’s death and the determination date (i.e. September 30 of the year following owner’s death), as the minimum distribution requirements were determined based on the beneficiaries who still held an interest in the account as of the September 30th date.

      For example, prior to 2020, if an IRA owner died naming a charity and owner’s son as equal beneficiaries, the son would have been prevented from using his own life expectancy to determine required minimum distributions if the charity (a non-individual) still held an interest in the IRA as of the determination date. However, if the charity received a distribution from the IRA in full satisfaction of its interest prior to September 30, son would be considered a sole designated beneficiary and could use his own life expectancy to determine required minimum distributions.


      1. Treas. Reg. §1.401(a)(9)-4, A-1.

      2. Treas. Reg. §1.401(a)(9)-4, A-1.

      3. Treas. Reg. §1.401(a)(9)-4, A-4(a).

      4. Treas. Reg. §1.401(a)(9)-3, A-3(a).

      5. Treas. Reg. §1.401(a)(9)-4, A-4(a).

      6. Rev. Rul. 2005-36, 2005-1 CB 1368.

      7. Let. Rul. 200616039.

      8. Treas. Reg. §1.401(a)(9)-4, A-3.

      9. Treas. Reg. §1.401(a)(9)-4, A-3.

      10. Treas. Reg. §1.401(a)(9)-4, A-5.

      11. Treas. Reg. §1.401(a)(9)-5, A-7.

  • 3697. Prior to the SECURE Act, what were the rules for determining required minimum distributions when there were multiple beneficiaries and separate accounts?

    • Editor’s Note: Beginning in 2020, non-spouse beneficiaries who do not qualify as eligible designated beneficiaries must generally deplete the account within ten years of the original account owner’s death. Therefore, the life expectancy rules discussed below are no longer relevant unless the beneficiary qualifies as an eligible designated beneficiary.

      If more than one beneficiary is designated as of the determination date (Q 3696), the beneficiary with the shortest life expectancy (i.e., generally the oldest) will be the designated beneficiary for purposes of determining the distribution period.1

      As an exception to the “oldest beneficiary” rule, if an individual account (including an IRA)2 is divided into separate accounts (as defined below) with different beneficiaries, the separate accounts do not have to be aggregated for purposes of determining the required minimum distributions for years subsequent to the calendar year in which the separate accounts were established (or date of death, if later).3

      For purposes of Section 401(a)(9), “separate accounts” are portions of an employee’s benefit (or IRA) representing the separate interests of the employee’s beneficiaries under the plan as of his date of death. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the accounts. Once separate accounts have been established, the separate accounting can provide for separate investments in each account, with gains and losses attributable to such investments allocable only to that account. A separate accounting also must allocate any post-death distribution to the separate account of the beneficiary receiving it.4

      Planning Point: When leaving an IRA to multiple beneficiaries, an owner may leave a fixed dollar (“pecuniary”) amount to one or more of them, with a “residual” gift to one or more other beneficiaries, or use “fractional”-type gifts for all beneficiaries. Although both methods are legal and acceptable, fractional gifts usually are preferable, for two reasons.

      First, if the owner uses a pecuniary gift (such as “pay $10,000 to Beneficiary A and the balance of the account to Beneficiary B”), the IRA provider may not know whether to give the “pecuniary” beneficiary just the flat dollar amount or to give that beneficiary the dollar amount plus or minus gains or losses that accrue after the date of death. The IRA provider’s documents and policies should spell this out, but many do not.

      Second, if the gift is truly a flat dollar amount, not adjusted for gains or losses occurring after the date of death, then that gift cannot qualify under the regulations as a “separate account” (see above) for minimum distribution purposes. Thus, the beneficiary of the flat dollar gift and the beneficiaries of the “residuary” gift will be considered beneficiaries of the same account. Natalie B. Choate, Esq., Bingham McCutchen.

      When separate accounts are established with different beneficiaries, the “applicable distribution period” is determined for each separate account disregarding the other beneficiaries only if the separate account is established no later than December 31 of the year following the decedent’s death.5 If this deadline is not met, separate accounts can be established at any time, but the distribution period in effect prior to the separation of the accounts (generally the life expectancy of the oldest beneficiary) will continue to be applied.6

      Planning Point: If the foregoing requirements are not met (i.e., if separate accounts are not established by the deadline or to the extent the IRA proceeds were payable to one trust benefiting more than one individual), the IRA nonetheless may be segregated into separate IRA accounts, but the “applicable distribution period” will be the life expectancy of the beneficiary with the shortest life expectancy.7

      If a trust is the beneficiary, separate account treatment is not available to the beneficiaries of the trust.8 Using the pre-2020 rules, the IRS has determined repeatedly that the establishment of separate IRA shares (i.e., creating separate IRAs titled in the name of the decedent for the benefit of the trust beneficiaries) did not entitle multiple beneficiaries of the same trust to use their own life expectancies as the distribution period.9 Where the trust established by the decedent to receive IRA proceeds included provisions for a subtrust benefiting the surviving spouse, the surviving spouse’s life expectancy was found to be controlling for all beneficiaries.10 In another instance, the IRS determined that where a father had failed to designate an IRA beneficiary, making his estate, which was left to his three children, the beneficiary, the decedent’s remaining life expectancy was controlling, although a subdivision of the IRA was permitted.11 The fact that the trust meets the requirements for a “see-through trust” (Q 3900) does not change this result.12

      The IRS has privately ruled, however, that where separate individual trusts were named as beneficiaries, the ability of each beneficiary to use his or her life expectancy was preserved even though the trusts were governed by a single “master trust.”13

      For details regarding contingent and successor beneficiaries, as well as other special rules, see Q 3900.


      1. Treas. Reg. §1.401(a)(9)-5, A-7(a).

      2. Treas. Reg. §1.408-8, A-1(a).

      3. Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      4. Treas. Reg. §1.401(a)(9)-8, A-3.

      5. Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      6. TD 8987, 67 Fed. Reg. 18988 (4-17-02).

      7. Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      8. Treas. Reg. §1.401(a)(9)-4, A-5(c).

      9. Let. Ruls. 200307095, 200317043, 200444033, 200432027, 200528031, 201503024.

      10. Let. Ruls. 200410019, 200438044.

      11. Let. Rul. 200343030.

      12. Let. Rul. 200317044.

      13. Let. Rul. 200537044.

  • 3698. What are an IRA trustee’s reporting requirements with respect to required minimum distributions?

    • Two reporting requirements are imposed on IRA trustees: one to the IRA owner, and one to the IRS.1 For IRA owners, “[i]f a minimum distribution is required with respect to an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA as of December 31 of the prior year must provide a statement to the IRA owner by January 31 of the calendar year.” The statement must satisfy one of the following alternatives:

      (1) It must inform the IRA owner of the amount of the required minimum distribution and the date by which it is required. The amount is permitted to be calculated assuming that the sole beneficiary of the IRA is not a spouse more than ten years younger than the IRA owner, and that no amounts received by the IRA after December 31 of the prior year are required to be taken into account to adjust the value of the IRA as of December 31 of the prior year for purposes of determining the required minimum distribution.2

      (2) It must inform the IRA owner that a minimum distribution is required with respect to the IRA, and offer to calculate the amount of the distribution on request by the owner.3

      The IRS has clarified that a trustee may use either of these two alternatives, or may use one alternative for some IRA owners and the other for other IRA owners.4

      The reporting requirements apply only to lifetime distributions. The IRA owner is presumed not to have a spouse more than ten years younger than the owner.5

      No reporting is required for after death distributions (i.e. inherited IRAs) or for Roth IRAs.6


      1. Notice 2002-27, 2002-1 CB 814.

      2. See Treas. Reg. §1.408-8, A-7 or A-8.

      3. Notice 2002-27, clarified by Notice 2003-3.

      4. Notice 2003-3, 2003-1 CB 258, Notice 2009-9, 2009-5 IRB.

      5. Notice 2002-27, 2002-1 CB 814.

      6. Notice 2002-27.

  • 3699. What IRS filing requirements does an individual retirement plan participant have to meet?

    • An individual who establishes an individual retirement plan does not have a filing requirement (other than what is reported on the individual’s 1040) for any year in which there is no plan activity other than a recharacterization or the making of contributions (other than rollover contributions) and permissible distributions.

      However, an individual does need to file Form 5329 with their tax return if there is any tax due because of an early (premature) distribution (Q 3677), excess contribution (Q 3669), or excess accumulation (Q 3682).1

      Moreover, a separate form also is required when nondeductible contributions are made to an IRA (see below).

      Nondeductible Contributions

      If an individual makes a nondeductible contribution to a traditional IRA for any year, the individual must report the following on Form 8606:

      (1) The amount of the nondeductible contributions for the taxable year

      (2) The amount of distributions from individual retirement plans for the taxable year

      (3) The excess of the aggregate amount of nondeductible contributions for all preceding years over the aggregate amount of distributions that were excludable from income for such taxable years

      (4) The aggregate balance of all individual retirement plans as of the close of the year in which the taxable year begins

      (5) The amount of a traditional IRA that is converted into and recharacterized as a Roth IRA, or the amount in the same Roth IRA that is then converted back into and recharacterized as a traditional IRA (prior to 2018, the Roth recharacterization rules were generally eliminated for tax years beginning after 2017)

      (6) Any other information as prescribed by the Secretary of the Treasury2

      Failure to file Form 8606 will result in a $50 penalty per failure unless it is shown that the failure was due to reasonable cause.3 In one case, a failure to file a Form 8606 resulted in the taxpayer’s inability to appropriately document his basis in his nondeductible IRA; contributions were taxed a second time on distribution (Q 3671).4 Overstatement of a nondeductible contribution is subject to a penalty tax of $100 per occurrence.5


      1. IRC Secs. 6058(d), 6058(e).

      2. IRC Sec. 408(o).

      3. IRC Sec. 6693(b)(2).

      4Alpern v. Comm., TC Memo 2000-246.

      5. IRC Sec. 6693(b)(1).

  • 3700. May an employer contribute to an IRA on behalf of an employee? May an employer or union establish an IRA for its employees or members?

    • Yes.

      An employer may contribute to a traditional or Roth IRA on behalf of any eligible employee (or an eligible spouse in some cases). Any contribution made by the employer must be included in the employee’s gross income as compensation for the year for which the contribution was made.1 The employer’s contribution is treated as though made by the employee and subject to the maximum contribution limits applicable to individual retirement plans (Q 3656, Q 3659). If the contribution is made to a traditional IRA and the employee is eligible, the employee may take a deduction subject to the limits in Q 3656. The employer deducts the contribution as salary or other compensation and not as a contribution to a retirement plan.2 Because amounts contributed by an employer are compensation to the employee, they are subject to FICA (Social Security tax), FUTA (federal unemployment tax), and income tax withholding.3

      A trust that will be treated as an individual retirement account may be set up by an employer or association of employees for the benefit of employees, members, or employees of members (or the eligible spouses of any of the foregoing) if the trust meets all the requirements of an IRA (Q 3641) and there is a separate accounting maintained for each employee, member, or spouse. A contribution made by an employer to a trust on behalf of an employee will be treated as a contribution to an individual retirement plan by such employee. The assets of an employer or association trust may be held in a common fund for the account of all individuals who have an interest in the trust. A trust may include amounts held for former employees or members and employees temporarily on leave. To qualify as an “association of employees” there must initially have been some nexus between the employees (e.g., a common employer, a common industry, etc.). An association may include members who are self-employed.4

      Employer contributions to an IRA (or employer or association trust that is treated as an individual retirement account) do not need to meet the nondiscrimination rules associated with qualified plans. An employer generally cannot satisfy the coverage requirement for a qualified plan by contributing to an individual retirement account (including an employer or association trust treated as an individual retirement account) or individual retirement annuity on behalf of employees not covered under the qualified plan.5

      The use of a payroll deduction program to fund employee IRAs will not subject the employer to Title I of ERISA (reporting and disclosure, participation, and vesting, etc.) where employer involvement is limited. The employer’s involvement is so limited where the employer maintains neutrality with respect to an IRA sponsor in its communications with its employees and so is not considered to have “endorsed” an IRA payroll deduction program. The employer must also make clear that its involvement in the program is limited to collecting the deducted amounts and remitting them promptly to the IRA sponsor, and that it does not provide any additional benefit or promise any particular investment return on the employee’s savings.6

      An employer also may establish “deemed IRAs” for employees under a qualified plan (Q 3645). An employer may contribute amounts higher than the usual individual retirement plan limits by establishing a simplified employee pension program (Q 3701) or a SIMPLE IRA (see Q 3706).


      1. IRC Sec. 219(f)(5); see Prop. Treas. Reg. §1.219(a)-2(c)(4).

      2. IRC Sec. 162; Prop. Treas. Reg. §1.219-1(c)(4).

      3. H. R. Conf. Rep. 93-1280 (ERISA ’74) reprinted in 1974-3 CB 500; H. Rep. 93-807, reprinted in 1974-3 Supp. CB 367; IRC Sec. 3401(a)(12)(C).

      4. IRC Sec. 408(c); Treas. Reg. §1.408-2(c).

      5. H. R. Conf. Rep. 93-1280 (ERISA ’74) reprinted in 1974-3 CB 499.

      6. Labor Reg. §2510.3-2(d); see IB 99-1, 64 Fed. Reg. 32999 (6-18-99).