There’s an old saying that goes, “Nothing is certain except death and taxes.” For retirement account holders, those two certainties can intersect when it comes to Required Minimum Distributions (RMDs). Account owners are required to begin taking annual withdrawals from their retirement accounts once they reach a certain age—known as their Required Beginning Date (RBD). But what happens if someone passes away before taking their full RMD for the year? The answer lies with the beneficiaries.
What Happens When the Account Owner Dies Before Completing Their RMD?
When a retirement account owner passes away before satisfying their RMD, the responsibility to complete it shifts to the beneficiary. The remaining distribution amount must still be withdrawn by December 31 of that same year. The withdrawn funds—and the related taxes—are attributed to the beneficiary, not the deceased owner or their estate.
It’s important to note that this distribution cannot be directed to a charity as a Qualified Charitable Distribution (QCD) unless the beneficiary themselves is at least 70½ years old. Beneficiaries will also need to submit required documentation to the account custodian, such as a death certificate. Each financial institution has its own process, so it’s wise to confirm their specific requirements. Failure to withdraw the remaining RMD amount by the deadline can result in a hefty 50% penalty on the shortfall.
Does the Timing of Death Affect the RMD?
Regardless of when the account owner dies during the year, the full RMD must be satisfied. For example, if the individual passes away midyear, beneficiaries are still responsible for completing the full annual RMD amount.
For retirees who chose to take monthly RMD payments, the timing of death determines how much remains to be distributed. If death occurs early in the year, fewer payments will have been made—leaving a larger remaining balance to fulfill.
There’s one exception related to the Required Beginning Date. If the account owner dies before April 1 of the year after reaching age 70½ (or 72, depending on applicable law), they haven’t yet reached their RBD—meaning no RMD is required for that year. However, if the individual dies after that date, they should have already completed their first RMD, and the beneficiary must handle the next one before the end of the year.
How Do the Rules Apply to 401(k) Accounts?
The same general rules apply to both IRAs and 401(k)s, including Roth 401(k)s, with one key difference. If the deceased was still employed and owned less than 5% of their company, they were not yet required to take RMDs. In that case, the RBD hadn’t been reached, and no distribution is required for that year.
This “still working” exception can delay the RMD requirement until after employment ends, offering additional flexibility for those who remain active in the workforce beyond traditional retirement age.
How Is the RMD Handled Among Multiple Beneficiaries?
When multiple beneficiaries inherit a retirement account, the rules are flexible regarding who actually takes the RMD. The key requirement is that the total RMD amount for the year must be met. As long as the full withdrawal is made, it doesn’t matter which beneficiary initiates it.
This can work to the advantage of heirs with different financial goals. For example, one beneficiary who prefers to receive cash may choose to take enough of the distribution to satisfy the full RMD requirement, allowing other beneficiaries to keep their share of the assets invested.
Final Thoughts
Understanding how Required Minimum Distributions work in the year of death is crucial for avoiding penalties and managing inherited retirement assets effectively. Beneficiaries should act promptly to determine whether an RMD remains unpaid and coordinate with the account custodian to ensure all requirements are met before year-end. Taking the right steps not only ensures compliance with IRS rules but also protects the financial legacy left behind.
