Steven J. Rosenthal, CPA, CFP, JD
Do Designated Beneficiaries of Inherited IRAs Have RMD Requirements?
For many years, the non-spousal beneficiaries of a decedent’s defined contribution plan who established their Beneficiary IRAs could often take RMDs (required minimum distributions) based on their own life expectancy, which could last for many years. These arrangements were commonly referred to as “stretch IRAs.” The ability to set up stretch IRAs was impacted by the SECURE Act of 2019. The Act provided that starting in 2020, many non-spousal beneficiaries (i.e., “designated beneficiaries”) were required to withdraw funds from their beneficiary IRAs using a ten-year rule. The rule was created to allow the government to raise tax revenue to offset the consequences of a rise in the age for requiring RMD distributions from nonbeneficiary retirement accounts with “pre-tax” assets.
The ten-year rule generally provides that beneficiaries must empty the entire beneficiary IRA account by the end of the 10th year following the year of the decedent account owner's death. What was unclear was whether a beneficiary IRA recipient was also subject to RMD rules during that ten-year period or whether the recipient could wait until the end of the ten-year period and take all the money out at that time. This lack of clarity was concerning because the penalties for failure to take an RMD were stiff, either 50% or 25% under the SECURE Act of 2019 and the Secure Act 2.0, respectively.
The IRS attempted to clarify the rules related to these distributions in Notice 2022-53, released Oct. 17, 2022. The IRS stated that it would not treat a beneficiary of an inherited account in a plan or IRA subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD. The IRS intends to issue final regulations related to required minimum distributions (RMDs) that should apply “no earlier than the 2023 distribution calendar year.”
As of this writing, the final regulations have not been issued, so beneficiaries are still in the dark in 2023 regarding whether RMD distributions are required. The speculation is that the IRS will need RMDs withdrawn during that 10-year period. Whatever the outcome, persons planning for retirement should take steps to avoid getting pushed into higher tax brackets by being forced into taking RMD distributions in an untimely manner.
Fulcrum Advisors can help its clients work around whatever treatment is required in the final regulations to preserve wealth. For further reading, see the following:
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Some IRA's have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA's and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.