Historically, beneficiaries of an inherited IRA were required to withdraw the funds based on whether the original IRA owner had begun taking distributions at the time of death. If the original IRA owner had begun taking distributions at the time of death, then the beneficiary would be required to take the distributions over the same remaining time frame. However, if the original owner of the IRA had not begun taking distributions at the time of death, then the beneficiary would be required to take distributions within 5 years or based on the beneficiary’s life expectancy.
On December 20, 2019, the Internal Revenue Code was amended by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) to extend the 5-year period to 10 years. The SECURE Act generally requires the use of the 10-year rule regardless of whether the original IRA owner had begun taking distributions at the time of death. The ability to take the IRA distributions over the beneficiary’s life expectancy was largely limited and now only applies to an Eligible Designated Beneficiary. IRC Section 409 defines an Eligible Designated Beneficiary as a surviving spouse, a minor child, a disabled child, or a chronically ill individual. It should be noted that there are exceptions to this rule for children once they reach the age of majority. The SECURE Act is effective for IRA’s inherited after December 31, 2019.
On February 24, 2022, the Treasury Department and the IRS published proposed regulations that would clarify the use of the new 10-year rule and the related Required Minimum Distributions (“RMD”). The proposed regulations provide that under the new 10-year rule, beneficiaries would be required to start taking distributions in the year following the original IRA owner’s death. Additionally, failure to do so would mean that the beneficiary would not meet the RMD for the year and that they would be subject to the 50% RMD penalty.
The Treasury Department and the IRS provided a 90-day comment period for the proposed regulations. During this period, taxpayers indicated that they presumed that the 10-year rule would apply much like the 5-year rule, under which there would not be an RMD due for a calendar year until the last year of the 5 or 10-year period. Further, it was requested that the Treasury Department and the IRS provide transition relief for failure to take distributions due in 2021 or 2022.
IRS Notice 2022-53 provides the relief that taxpayers requested. For taxpayers that inherited an IRA after December 31, 2019, and did not take an RMD in 2021 and 2022, they will be provided transition relief and no RMD penalty will be imposed. Further, the Notice provides that the IRS intends to issue final regulations related to RMDs and that they will apply no earlier than the 2023 distribution calendar year.
Summary and Takeaways
The previous distribution rules are still effective for IRAs inherited before December 31, 2019. If you were previously taking distributions over the deceased life expectancy, or your own life expectancy under the rules then in effect, there is no change.
However, if you inherited an IRA, and the original IRA owner died after December 31, 2019, then the new rules apply. RMDs are required starting the year following the original IRA owner’s death with the final distribution in the 10th year.
If you have any questions related to a recently inherited IRA and the related required distributions, please do not hesitate to reach out to us for assistance.