RMD Rules Delayed for Inherited IRAs…Again

Answer: The rules for IRA inheritances have become more complicated for some designated beneficiaries. There is a 10-year rule that 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 starting their Required Beginning Date, to take annual Required Minimum Beneficiary Distributions (RMBDs) in years 1-9. Taxpayers are unsure what rules they are subject to regarding the need to take an annual RMBD. 

So, what’s going on? 

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 will have to make an annual RMBD. If you 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.

How we got here

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 time limit.

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.

The problem is obvious and has caused confusion. In 2022 the IRS released proposed regulations that applied to a group of beneficiaries that inherited IRAs  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, since the proposed regulation hasn’t yet been finalized. 

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 CERTIFIED FINANCIAL PLANNER™ Professional and your tax professional to review your situation. They can tell you how to comply with the new rules and how to factor those annoying RMBDs into your long-term financial plan while incorporating tax ramifications into an already complicated situation. Stay focused, plan accordingly, and don’t hesitate to ask for help.