A Refresher on Recent Changes to Required Minimum Distributions for Inherited IRAs
In December 2019, Congress passed the SECURES Act. One of main provisions of the Act was the amendment of IRC Section 401(a)(9) which covers the Required Minimum Distribution (RMD) rules for beneficiaries of inherited IRA accounts. Prior to the amendment of this section, beneficiaries of inherited Individual Retirement Accounts (IRAs) could typically use their remaining life expectancy to calculate and take RMDs from inherited IRAs. This was commonly known as the “stretch” IRA.
Under the SECURES Act, for any inherited IRA after 2019, certain designated beneficiaries are now required take all distributions from the inherited IRA account by the end of the 10th year following the death of the IRA owner. Thus, the SECURES Act eliminated the “stretch” IRA.
RMD Rule Exceptions
There are a few exceptions to the 10-year payout rule. The new rules do not apply to certain individuals the IRS labels “eligible designated beneficiaries” (EDBs). EDBs include spousal beneficiaries, beneficiaries who are minors, beneficiaries who are not more than 10 years younger than the IRA owner and chronically ill or disabled beneficiaries (as defined by the IRS).
In February of 2022, the IRS issued proposed regulations interpreting the amendments made to IRC Section 401(a)(9) by the SECURES Act. The proposed regulations specified that designated beneficiaries of inherited IRAs who do not qualify as EDBs are required to take RMDs in each of years 1 through 10 following the death of the IRA owner if the owner had already begun taking RMDs. The remaining balance of the account must then be fully distributed by the end of year 10. If the owner had not reached the age that triggered RMDs, the designated beneficiary must still take out all of the IRA by year ten, however they are not required to take any distributions in years 1-9. These provisions caught many taxpayers and advisors off guard, as original interpretations of the SECURES Act provision was that annual distributions in years 1 through 9 were not required for any beneficiaries as long as the total amount of the inherited IRA was distributed by the end of 10th year following the death of the IRA owner.
Given that the proposed regulations were not issued until 2022, many designated beneficiaries likely did not take any RMDs in 2021 and have not done so thus far for 2022. Penalties for not taking RMDs are quite substantial (50% of the amount that should have been withdrawn) so the proposed regulations caused much panic for many taxpayers who fell under these new rules.
IRS Notice 2022-53
Thankfully, in a taxpayer friendly move, on October 7, 2022, the IRS issued Notice 2022-53, which provides relief to taxpayers that did not take RMDs from inherited IRAs for 2021 and 2022.
Under the provisions of the Notice, distributions for 2021 and 2022 are not required to be withdrawn from inherited IRA accounts and the IRS will not enforce the 50% penalty tax against those taxpayers if distributions are not taken. If a taxpayer has already paid the penalty, a refund of that excise tax can be requested by filing an amended return.
The Notice indicates that the IRS plans to publish final regulations, however the final regulations will apply no earlier than the 2023 distribution year. These final regulations may make final the rules as detailed in the proposed regulations or follow some other course.
For those designated beneficiaries that are not required to take annual RMDs during the 10-year period, we recommend contacting your Keiter Opportunity Advisor to discuss strategies and timing for taking distributions from the inherited IRA.
What’s Next for RMD Rules?
Keiter will continue to monitor IRS developments in this RMD area and provide updates. Please keep in mind that both the Senate and the House have passed their versions of a SECURES Act 2.0 that could impact these RMD rules.
Questions on how RMD rule changes may impact your Inherited IRAs? Contact your Keiter Opportunity Advisor.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.