RBD – PROACTIVE SALLY AND OBLIVIOUS JERRY

By Andy Ives, CFP®, AIF®
IRA Analyst
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Last week the Ed Slott team hosted another highly successful and sold-out 2-day advisor training program at Caesar’s Palace in Las Vegas. Over 250 financial professionals from across the country attended, and we plowed through our 400-page manual. During the two day event we discussed IRA beneficiary rules, trusts as beneficiary, net unrealized appreciation, backdoor Roth IRAs, SECURE 2.0 changes, QCDs, the pro-rata rule, gifting strategies, etc. During the breaks, the line of advisors with questions at our front table resembled a McDonald’s counter at lunchtime. We did our best to address each individual inquiry as thoroughly and thoughtfully as possible.

One question that came up during an early break had to do with the required beginning date (RBD). This is the date when required minimum distributions (RMDs) are to begin. That date is generally April 1 of the year after a person turns 73 (or 72 prior to SECURE 2.0, or 70 ½ prior to the original SECURE Act). The confusion centered around how RMDs are applied when a person dies before the RBD or on or after the RBD. Since I was the first speaker after the break, I promised to give clear examples when I was next up. Here are the two scenarios I outlined:

Proactive Sally. Proactive Sally likes to get stuff done. Sally turned 72 last year in January and falls under the old age 72 RMD rule. Proactive Sally knows that 2022 is her first RMD year, so she runs down to the bank and takes her 2022 RMD early in the year. Proactive Sally is pleased knowing she has satisfied her very first IRA RMD. Even though she could have delayed that first RMD until April 1 of 2023, as her name suggests, she likes to check items off her to-do list.

In the fall of 2022, Proactive Sally is the first one to step off the curb when the light says “Walk.” She gets hit by a bus and dies. Subsequently, what was that distribution she took in January? Was it an RMD? Since Proactive Sally died before her RBD, that withdrawal becomes just a voluntary distribution that she did not need to take. Sally took it in anticipation of reaching her RBD, which is how the first RMD works…but she had no idea a bus was coming for her.

Oblivious Jerry. Oblivious Jerry also turned 72 last year in January, but Jerry never heard of the acronym “RMD.” Jerry has an IRA, but he does not know that distributions are required. Jerry takes no withdrawals in January. In the fall of 2022, Jerry still has not taken any distributions. The calendar changes. It is January 2023, Oblivious Jerry turns 73 years old, and he still has not taken any money from his IRA.

In late March 2023, Oblivious Jerry has a meeting with his financial advisor. The advisor says, “Jerry, you turned 72 last year. You need to take your 2022 RMD. In fact, you also need to take your 2023 RMD.” Jerry panics, has a heart attack, and dies right there in the advisor’s office.

Questions: Does Jerry have a missed RMD situation? Do Jerry’s beneficiaries need to worry about a year-of-death RMD? Answers: No, and No. Oblivious Jerry never made it to his RBD.

The Required Beginning Date: It is a definitive line in the sand, a clear black circle on the calendar – April 1 of the year after you turn 73 (or 72 or 70 ½ previously). You can either die before that date, or on or after, but you have to make it there for RMDs to officially turn on.

https://www.irahelp.com/slottreport/rbd-proactive-sally-and-oblivious-jerry

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