The Internal Revenue Service has again postponed releasing final rules on required minimum distributions for inherited individual retirement accounts. Because of the delay, some beneficiaries of IRAs inherited after 2019 won’t be penalized for not taking required minimum distributions in 2023.
There have been many important legislative changes for retirement accounts over the past few years. Notably, in 2019, the SECURE Act eliminated the “stretch-IRA” which had allowed most inheritors of individual retirement accounts to take distributions over their lifetimes. In its place, the new law introduced the 10-year withdrawal rule, requiring many beneficiaries who inherited IRAs on or after January 1, 2020 to empty the retirement account within ten years of the original account owner’s death.
The 10-year rule applies to most non-spouse beneficiaries of traditional IRAs. Surviving spouses, children of the account owner until age 21, disabled and chronically ill individuals, and individuals no more than 10 years younger than the original IRA owner can follow the old rules and empty the funds over their lifetimes. Different withdrawal rules apply when the beneficiary is an estate or a charity.
Even the Internal Revenue Service had trouble interpreting the new rules for retirement accounts. An important question was whether inheritors needed to take annual withdrawals over the 10-year period or if they could wait until the tenth year to empty the account. The timing of when the funds are taken out can have significant tax implications. Because withdrawals from inherited retirement accounts are treated as income by the IRS, the ability to time withdrawals with lower income years would be advantageous. Additionally, leaving money in an IRA for longer allows more tax-deferred growth of the account.
EVOLVING DISTRIBUTION REGULATIONS
In February 2022, the IRS proposed rules requiring beneficiaries to make annual withdrawals during the 10-year window in cases where the original owner was already taking RMDs. Withdrawals are not required in years one through nine if the original IRA owner had not started taking distributions before death, but the account must still be completely emptied within ten years.
As we’ve reported before, in recognition of the confusion around the rules, the IRS issued a notice in October 2022 retroactively waiving RMDs for inherited IRAs for the 2021 and 2022 tax years.
In July 2023, the IRS said it would continue to delay enforcement of the new rules. Like the October 2022 guidance, the new release doesn’t specifically waive RMDs but instead provides relief from penalties for missed distributions.
While we have clarity for the 2023 tax year, we will need to continue to wait for the IRS to finalize regulations on retirement accounts that need to be emptied within ten years.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.