RETIREMENT & LONGEVITY
Some beneficiaries who inherited an IRA in 2020 or 2021 will not face withdrawal penalties until 2023.
If you inherited a retirement account in 2020 or 2021, you may be impacted by a recent IRS decision. The IRS may not expect required minimum distributions (RMDs) to be made from that account for tax years 2021 or 2022 for a subset of IRA beneficiaries that are subject to the 10-year payout, according to Notice 2022-53.
Requests for “transition relief” from new proposed regulations for people who inherited IRAs recently led the IRS to suspend penalties on RMDs from those accounts until 2023. This decision may affect you if you are the beneficiary of an IRA owner who died in 2020 or 2021 after their required beginning date and are required to take RMDs under the 10-year rule.
Designated beneficiaries (heirs who are not one of the following: a spouse, minor child, disabled, chronically ill or not more than 10 years younger than the original IRA owner) who inherited an IRA from 2020 to 2021 and are subject to the 10-year rule will not face any RMD withdrawal penalties until 2023. The 10-year rule results from the SECURE Act of 2019, which requires beneficiaries to deplete an inherited IRA by December 31 of the 10-year anniversary of the original IRA owner’s death.
Normally, a 50% penalty is applied to the required withdrawal when those RMDs are not taken. Also, any penalties already paid can be refunded by request.
It should be noted that RMDs are not being fully waived – rather, penalties for not taking them are being suspended for the time being. The IRS has stated that new guidance from proposed regulations will apply no earlier than 2023, so, for now, the effect on those required to take RMDs is effectively null.
Individuals who inherited an IRA before 2020, are eligible designated beneficiaries or IRA owners are still required to take distributions and the penalty waiver does not apply to them.
Please consult your tax professional for more information. Raymond James and its advisors do not offer tax or legal advice.
Source: IRS Notice 2022-53