Since the passing of the SECURE Act in December 2019, there has been plenty of confusion on the rules for Inherited IRAs, and rightly so. Without getting too into the weeds, we’ll attempt to un-muddy the waters a bit.
Prior to the SECURE Act, if you inherited an IRA, you could generally “stretch” your distributions over your own life expectancy. As of the date on this post, people who inherit an IRA from an owner who passed away on or after January 1, 2020, are required to withdraw all assets from the IRA within 10 years following the death of the original owner. Side note: If you are classified as an Eligible Designated Beneficiary, you are still allowed to stretch your distributions over your lifetime, but more on that later.
When the IRS published this new 10-year rule, it was not clear if RMDs needed to be taken each year or if the total amount just needed to be exhausted by the 10th year. Most believed it was the latter until the IRS published proposed regulations on February 24, 2022.
The IRS has taken the stance that if the death of the original account holder occurred on or after their required beginning date (RBD), which is April 1st of the year after a person turns 73, a beneficiary must also take RMDs in years 1-9 and the total balance emptied in year 10. If the original account holder died before their RBD, no RMDs are required in years 1-9, but the balance must still be emptied by year 10.
An easy way to remember the new 10-year rule is to understand if the RMDs were “turned on” during the original account holder’s lifetime, the beneficiary will need to leave them on. They cannot be “turned off.”
If the original account holder died before their RBD and no RMDs had been “turned on” yet, the beneficiary can leave them off and is not required to take distributions in years 1-9. Note, all Roth IRA account holders are considered to have passed before their RBDs and hence the beneficiary does not need to take RMDs in years 1-9. Again, if you are an Eligible Designated Beneficiary of a Roth IRA, you are allowed to stretch distributions over your lifetime.
Now that I’ve mentioned them twice, let’s look at what an Eligible Designated Beneficiary (EBD) is. If you are a beneficiary of an IRA (or Roth IRA) and fall into one of these four categories, you are considered an EDB:
- A minor child of the original account owner (Grandchildren do not qualify).
- Not more than 10 years younger than the original owner (Being any number of years older qualifies).
- Disabled or chronically ill
- Spouse of the original account owner
If you qualify as an EDB, you can stretch your RMDs over your lifetime using the same rules that were in place before the SECURE Act. An RMD must come out of your Inherited IRA each year, but you are not required to empty the balance in year 10.
Anyone not falling into these three categories is classified as a Non-Eligible Designated Beneficiary (NEDB) and is subject to the 10-year rule. If you have determined you are a NEDB and subject to the 10-year rule, you will need to determine if the original account holder had started taking RMDs or not. If they had “turned them on,” you will be required to take RMDs in years 1-9, with the balance emptied in year 10.
Clear as mud, right? Well hang with me a bit longer while I throw another wrench at you. Due to all the confusion and the new regulations only being in a proposed state at this time, the IRS issued Notice 2022-53 in October of 2022 and Notice 2023-54 in July of 2023. These notices provide relief by waiving missed RMDs for 2021, 2022, and 2023 for an IRA beneficiary subject to the 10-year rule. It should be clarified that this does not extend a beneficiary’s 10-year period. Let’s look at an example for clarification:
In 2020, Dana Sue inherited an IRA account from her 83-year-old Aunt Francis. Since Dana Sue does not fall into any of the four categories for Eligible Designated Beneficiaries, she is classified as a Non-Eligible Designated Beneficiary who is subject to the 10-year rule. As Aunt Francis died after she had begun taking RMDs from her IRA, Dana Sue will have to leave RMDs “turned on” and take a distribution in years 1-9. Unfortunately for Dana Sue, Pittenger & Anderson was not her advisor at the time she inherited her Aunt’s IRA so she did not realize she needed to start her distributions in 2021 (year 1). She also missed 2022 (year 2) and 2023 (year 3). Luckily, Dana Sue will not be penalized for these missed RMDs, but the clock on her 10-year period has already begun. She now needs to take RMDs in the remaining years 4-9, with the total balance exhausted by year 10.
At P&A, our team stays up to date on the regulations and rules regarding Inherited IRAs and RMDs. As previously stated, these new regulations are only proposed, and it could possibly be years before the IRS releases its final regulations. Until then, we believe it is advisable for beneficiaries to follow the guidance from these proposed regulations. If you have any questions or want to discuss your Inherited IRA in more detail, please feel free to reach out to your Lead or Service Advisor.
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