Required Minimum Distribution During Year of Death

As the old saying goes: “Nothing is certain but death and taxes.”

Owners of retirement accounts are required to take annual distributions, known as Required Minimum Distributions (or RMDs) each year, starting at their Required Beginning Date (or RBD). The RBD is April 1st of the year after they reach the age of 70 ½. But what happens if the account owner should pass away before they’ve satisfied their RMD for the year? In this scenario, their beneficiaries are responsible for fulfilling the remaining amount.

What does this mean for the beneficiary?

If you inherit a retirement account and the RMD has not been completed at the time of death, it’s your responsibility as beneficiary to satisfy the remaining amount. The distribution (along with the associated tax bill) goes directly to you as the beneficiary, not the original owner or their estate. It cannot be donated directly to a charity as a Qualified Charitable Distribution unless the beneficiary is also over the age of 70 ½, as the beneficiary will be required to submit some paperwork along with a death certificate to the custodian of the account. Each custodian has their own rules and procedures so it’s best to check those requirements closely. If the full distribution amount is not taken by the December 31st deadline, it will be subject to a 50% missed RMD penalty.

Does time of death matter?

The full RMD amount must be satisfied, no matter what time of year the original account owner passes away. For example, if death occurs halfway through the year, the RMD is not halved; the full amount must still be taken. In the case of someone who was taking their RMD in monthly installments, the time of year they die can be significant. If it occurred earlier in the year, fewer installments would have been taken and therefore more of their RMD will still need to be distributed in order to reach the full amount. If the original owner dies before April 1st of the year following the year they turn 70 ½, they would not yet have reached their RBD, so no RMD needs to be taken. If they pass away after April 1st of the year after they turn 70 ½, they should have already taken their first RMD and the beneficiaries will be required to satisfy the remainder of their second RMD by the end of the year.

Are the rules different for 401(k)s?

401(k)s, both traditional and Roth, abide by the same rules with one notable exception: If the original owner was still employed at the time of their death and owned less than 5% of the company, their RBD would not have been met since employees are not required to take their RMD while they are still employed.

Does it matter who takes the RMD?

In the case of multiple beneficiaries, there is no rule on who takes the RMD and as long as the full RMD is taken, there will be no penalty. This can present a good opportunity if one beneficiary wants to liquidate the inheritance while others want to keep it invested. The heir who prefers cash in hand may be able to satisfy the full RMD with their portion, leaving the assets of the remaining beneficiaries invested.