For taxpayers who are the beneficiary of an IRA or other retirement account, The SECURE Act changed the Required Minimum Distribution (RMD) rules for inherited IRAs. While final regulations are expected in 2023 but have not yet been issued, the IRS did issue guidance in IRS Notice 2022-53.
Included as part of the SECURE Act are new rules for individuals who died after December 31, 2019 and passed on retirement accounts to beneficiaries. The new rules required the designated beneficiary’s inherited IRA to be fully distributed within 10 years of the death of the deceased retirement account owner. However, the distribution rules differ depending on whether or not the deceased individual had reached the age of 70.5 (72 if they passed away after 2019) and had already started taking their Required Minimum Distributions (RMD):
For taxpayers that inherit an IRA and the RMDs have already started for the original retirement account holder, then:
- The designated beneficiary must continue to take annual RMDs over the life expectancy of the designated beneficiary, and
- The inherited IRA must be fully distributed by December 31 of the 10th year following the year of the original retirement account owner’s death.
For taxpayers that inherit an IRA and the RMDs have not begun because the original account owner died before their RBD commenced, then:
- The designated beneficiary is not required to take any annual RMDs in years 1 – 9, but has the option of doing so if they choose, and
- The inherited IRA must be fully distributed by December 31 of the 10th year following the year of the original retirement account owner’s death.
The notice does include some good news for taxpayers that may have missed RMDs for the years 2021 and 2022 resulting from SECURE Act’s lack of clarity relating to RMDs. The IRS has provided an automatic waiver of penalty for those RMDs not taken for those two years only, which is great since the penalty for Failure to Take the RMD is equal to 50% of that year’s missed RMD.
If you are the beneficiary of an inherited IRA or other retirement account, please reach out to the financial institution holding the retirement account, your tax accountant, and/or the estate lawyer to make sure you are complying with these recently revised RMD rules.