Recent IRA Inheritors Get Another Year With No Distribution Requirement

In what's becoming an annual ritual, the IRS has once again waived required minimum distributions for the current year for people who inherited an IRA from someone who died in 2020 or after. That's welcome news, but some uncertainty still hangs over a growing number of people whose inherited IRAs are subject to new rules precipitated by the SECURE Act, which was passed in December 2019.  

That law killed the so-called "stretch IRA" -- which let beneficiaries minimize distributions by spreading them out over their life expectancies. The SECURE Act now requires most non-spouse beneficiaries to completely empty an inherited IRA by Dec. 31 of the year containing the 10th anniversary of death. For example, a child who inherited an IRA from a parent who died on Oct. 20, 2021 has until Dec. 31, 2031 to take all the money out. 

That all seemed straightforward and simple enough. Tax professionals and financial planners universally assumed that people with inherited IRAs subject to the SECURE Act's "10-year rule" could take out as little or as much as they wanted until the 10th year, when the remainder would have to be withdrawn. 

Aggravatingly, the IRS had other ideas. When it drafted the regulations to enforce Congress's "10-year rule," the despised organization needlessly complicated things for situations where the deceased retirement account owner was old enough to have been subjected to RMD requirements.  

Specifically, it decreed that -- during Years 1 through 9 -- heirs would have to take annual required minimum distributions (RMDs) based on their life expectancies and calculated with a factor from an IRS table. Then, in Year 10, they'd have to withdraw whatever's left. 

Proposed Regs.: If decedent was subject to RMDs, you might need to take distributions every year for 10 years from a non-spousal inherited IRA.

IRS in 2022, 2023 and 2024: Nah, do whatever you want. Maybe we’ll let you know for 2025. (Notice 2024-35)https://t.co/WS8HIqwwbb

— Justin Miller (@justinmilleresq) April 17, 2024

The IRS didn't issue those proposed regulations until 2022 -- which meant affected people who hadn't taken RMDs in 2021 had broken a rule that hadn't been created yet. That unjustness combined with a broad uproar from taxpayers, tax advisors and financial institutions over the complexity of the proposed regs prompted the IRS to announce that it would waive the penalty for not taking RMDs in 2021 and 2022.

As the IRS continued wringing its hands over its mess -- and as IRA heirs continued wondering if the final regulations might turn out mercifully simpler -- the IRS issued another RMD-penalty waiver for 2023. On Tuesday, the IRS similarly announced there'd be no penalty for failing to take RMDs from affected accounts in 2024.

All the while, the wait for final regulations continues. With its announcement of the 2024 waiver, the IRS said those final regs are expected to apply to RMDs for 2025, which implies they'll be published later this year -- close to five years after the legislation that triggered the need to lay out new rules for taxpayers. 

Generally speaking, withdrawals from traditional IRAs are fully taxable as ordinary income. While we're conditioned to defer taxation, there may be some circumstances where it's not in your best interest to wait until Year 10 to take most of the money out.

For example, if the account is big enough, a large, single withdrawal could push you into a higher tax bracket, or have a domino affect on other elements of your tax return that key off your adjusted gross income. Then there's the question of what future tax rate you'll be subjected to in a late-stage empire that's $34.7 trillion in debt.

If the IRS goes forward with requiring distributions in Years 1 through 9, you'll be responsible for making sure you take out at least the right amount; you can take more if it suits your tax-planning. In the first few years after the SECURE Act passed, many financial institutions threw up their hands on inherited IRA RMD calculations, merely telling investors ask a tax advisor. Now, they're starting to come around. Vanguard, for example, offers an online, inherited IRA RMD calculator that anyone can access.  

Two final points of emphasis:

• The 10-year rule only applies to IRAs inherited from owners who died in 2020 or later. Earlier-inherited accounts use the old rules, which allow for "stretch IRA" distributions over their lifetime.
• The same grandfathered treatment generally applies to IRA-inheritors who fall into any of five classes of "eligible designated beneficiaries": Surviving spouses, minor children of the account owner, disabled people, the chronically ill, and people who are either older than or not more than 10 years younger than the deceased IRA owner.