For high drama, summer is high season for moviegoers, thanks to Hollywood blockbuster film releases. Those with Inherited Retirement Accounts have been experiencing heir drama since 2020 thanks to Congress and the IRS – and the spectacle continues.
Congress passed the Secure Act in 2019 which changed many of the long-standing rules governing IRAs and other retirement accounts.
One of the more impactful changes was to the post-death distribution rules for retirement accounts held by “Non-Eligible Designated Beneficiaries” (essentially beneficiaries who are not surviving spouses).
The new rules applied to IRAs whose original owner died after January 1, 2020 did away with favorable tax treatment called the “Stretch IRA” for most Non-Eligible Designated Beneficiaries.
According to the new rules, rather than being able to take IRA distributions based on their own life expectancy, Non-Eligible Designated Beneficiaries were required to empty their inherited accounts within ten years of the death of the original owner.
The drama results from the interpretation of the requirements for timing of the distributions for Non-Eligible Designated Beneficiaries. The wording of the Secure Act was somewhat vague and therefore caused confusion about how heirs needed to take distributions.
Many observers expected that Non-Eligible Designated Beneficiaries would not be required to take annual distributions during this 10-year period as long as the account was fully distributed by the end of the 10th year.
In February 2022, the IRS issued Proposed Regulations that would make a subset of these beneficiaries (those who inherit accounts from decedents who died on or after the date whereby they were required to begin taking distributions) subject to both the 10-Year Rule and annual Required Minimum Distributions (RMDs).
The source of the drama was that these were merely proposed regulations, so beneficiaries remained in limbo regarding whether they would need to take distributions in 2022 (or should have taken them in 2021) to avoid potential tax penalties.
Then in October 2022 the IRS issued a notice waiving any potential penalties for Non-Eligible Designated Beneficiaries for 2021 and 2022 for missing RMDs from their inherited retirement accounts, which effectively eliminated RMDs for those years.
The tax saga continued to play out, because the IRS remained silent about the requirements for 2023 and onward.
Heirs who’ve been enjoying the tax-related theatrics were treated to a new release from the IRS in July 2023. Notice 2023-54 eliminates penalties for Non-Eligible Designated Beneficiaries for failing to take RMDs for 2023 and pushes forward RMDs yet again until at least 2024.
But the drama rolls on, because the IRS has yet to provide information as to when final regulations might be expected that could clarify RMD requirements for future years.
From a tax planning perspective, although Non-Eligible Designated Beneficiaries do not have to take distributions from their inherited accounts, they can still make voluntary distributions.
If you fall into the category of Non-Eligible Designated Beneficiary, you may want to consider the impact to your income tax situation over time by delaying distributions. Holding off could mean future spikes in taxable income, and ultimately paying more in tax over time.
If you have questions, Susan and I can help you look more closely at your tax situation. We can recommend tax-related strategies, including retirement account distribution strategies, with the goal of reducing the amount of tax you’ll pay over the long term.
If you’re an existing client, we encourage you to send us a copy of your 2022 tax return so we can review it and help minimize any potential drama related to your future tax situation.
RK