Beneficiaries of Inherited IRAs
If you’ve recently inherited an IRA or are set to inherit one soon, you need to know that the rules surrounding IRA inheritances have become more complicated for some designated beneficiaries. Most notably, a “10-year rule” applies to most non-spousal beneficiaries who receive inherited retirement accounts. This rule requires that beneficiaries of IRAs must liquidate the entire account by the end of the 10-year anniversary of the IRA owner’s death. However, proposed Treasury regulations require that beneficiaries under this 10-year clock, who inherit from an IRA owner who died after their Required Beginning Date, to take annual Required Minimum Beneficiary Distributions (RMBDs) in years 1-9. These proposed regulations have left taxpayers unsure if they’re required to follow them and take an annual RMBD.
Deaths After Original Owner’s Required Beginning Date
The 10-year rule went into effect for most non-spousal beneficiaries who inherit IRAs after December 31, 2019. Most industry professionals believed that the 10-year rule only required the account to be fully distributed by the end of the 10th year, without annual distributions. But a proposed 2022 regulation added a required minimum beneficiary distribution to the equation for a subset of IRA beneficiaries: specifically, designated beneficiaries who inherit from an IRA owner who died after their Required Beginning Date. These beneficiaries would have to make an annual RMBD. If you an inherit from an IRA owner who died before their Required Beginning Date, only the 10-year rule applies, but there’s no RMBD.
RMBDs require you to withdraw funds at a specified amount and if not taken, penalties will apply. Since the 2022 proposed regulations took taxpayers and industry professionals by surprise, the IRS has issued penalty waivers for those individuals possibly affected by the proposed regulations, which also gives the IRS more time to issue final regulations.
No RMBDs Required for the 2020 to 2024 Tax Years
Beginning with the SECURE Act of 2019, the IRS applied stricter distribution rules on those inheriting IRA accounts by implementing a 10-year rule for most non-spouse beneficiaries, significantly reducing the distribution timeframe. In February 2022, the IRS proposed an additional regulation that would impose both a 10-year rule and RMBDs on anyone who inherited an account from someone who was already past their own required beginning date.
It’s not difficult to see the problem: The IRS released proposed regulations in 2022 that applied to a group of beneficiaries that inherited them in 2020 and later. It also left taxpayers wondering if they need to follow proposed regulations or wait until final regulations are issued. This resulted in the IRS waiving penalties for RMBDs not taken in 2021 and 2022. On July 14, 2023, the IRS announced that inheritors who didn’t take RMBDs in 2023 will also receive penalty waivers. Then on April 16, 2024, the IRS announced that it is extending the relief to the 2024 tax year because the government has still not finalized the proposed regulation yet.
What you should do
If this all sounds confusing, that’s because it is. If you inherited an IRA after December 31, 2019 and you’re unsure if or how this applies to you, meet with your financial advisor – and perhaps also a tax professional – to review your situation. They can tell you how to comply with the new rules and how to factor those pesky RMBDs into your long-term financial plan.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Sources: IRS Notice 2024-35, keiter; kiplinger; kitces; putnam wealth management
This information was provided by Raymond James for RJ advisor use. Raymond James and its advisors do not provide tax advice.
