New IRS Regulations for Inherited IRAs
The IRS has finally provided an answer to inherited IRA beneficiaries - and (no surprise) it is not a welcomed answer. Consistent with what it claims Congress intended, the IRS has issued new regulations updating the required minimum distribution (RMD) rules that will require certain beneficiaries take RMDs beginning the year after the IRA owner’s death.
Since the passage of the SECURE Act in 2019, IRA beneficiaries could no longer stretch out their IRA account withdrawals over their lifetime. Under the SECURE Act, non-spouse IRA beneficiaries (unless a disabled or chronically ill beneficiary, or not more than 10 years younger than the deceased owner), had 10 years to distribute the entire IRA account. What was unknown was whether a non-spouse beneficiary had to take an annual required minimum distribution during the 10 year period or if the beneficiary could forgo annual distributions, provided the balance was withdrawn by the end of the 10 year period. The IRS has issued final regulations which require non-spouse beneficiaries to take annual RMDs each year (based upon their life expectancy) with the account balance distributed by the end of the 10 year distribution period. With the new regulations, there are a few important things to note:
1. Non-spouse, disabled or chronically ill beneficiaries, or beneficiaries not more than 10 years younger than the deceased IRA owner continue to be excluded from the 10 year distribution period.
2. If the account owner dies before reaching their RMD age (now if under age 73), beneficiaries are not required to take annual RMDs, but must withdraw the balance by the end of the 10 year period.
3. The new regulations do not take effect until 2025, but the 10 year deadline is not extended. For example, IRA accounts inherited from a decedent who died in 2020, must be fully distributed prior to 2031.
4. The penalty for missed withdrawals is 25%.
In light of the new regulations, taking out only the RMD each year could result in a large balloon distribution in year 10 and of course, a big tax bill (just what Uncle Sam would prefer). If you are an inherited IRA beneficiary subject to the 10 year, annual RMD rule, now would be a good time to consult with a financial advisor or tax professional.
This blog post is written by Brett A. Howell, Certified Elder Law Attorney. The blog is written as a service of The Elder and Estate Planning Law Firm, P.L.L.C. This information is for general informational purposes only and does not constitute legal advice. For a consultation to address specific questions, please call (810) 953-3846.
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