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IRA distribution rules are complex.Internal Revenue Service building in Washington DC
Stephanie Reynolds/AFP/Getty Images
The Internal Revenue Service has allowed those who inherited individual retirement accounts after 2019 to skip the required minimum distributions this year, but most still have 10 years to empty their accounts.
The IRS released new guidance on Friday.
Confusion over inheritance IRA rules has continued since the Safety Act of 2019 eliminated so-called “stretch IRAs” for most non-spousal beneficiaries. Older rules allowed inherited IRA beneficiaries to extend the minimum distribution required over their lifetime, and in some cases extended tax exemptions or tax deferrals for decades.
Under the 2019 Security Act, most non-spousal beneficiaries must empty their inherited IRA by the end of the tenth year after the death of the original owner. Ed Slott, a CPA and founder of IRAHelp.com, said when the law was first passed, experts interpreted it to mean you could withdraw the full amount in the 10th year if you wanted to.
But in early 2022, the IRS proposed stricter rules for people who inherit an IRA from someone who had already started taking an RMD. In this case, the recipient must continue to receive distributions according to the annual schedule. In other words, if the RMD tap was already on, it couldn’t be turned off after the original owner’s death, and beneficiaries had to continue to withdraw each year and pay income tax on the amount withdrawn, Slott says. “It was devastating,” Sloth says.
Due to the delay in the proposal and general confusion about the rule, the IRS on Friday effectively waived its annual requirement for now.
Here’s what the latest guidance from the IRS means for you:
What if I inherited an IRA before 2020?
New rules are irrelevant. You are subject to the so-called Stretched IRA Rules that were in effect before this law was passed. The relief announced on Friday also doesn’t apply to you, so even if you have an RMD scheduled for this year, you should take it.
What if I inherit an IRA from my spouse?
None of the changes apply to spouses, who enjoy more flexibility when inheriting an IRA. Her spouse’s IRA can be rolled over to her own retirement account or kept as an inheritance account. In any case, we can stretch the distribution based on life expectancy instead of 10 years.
Are there other beneficiaries who can receive RMD based on their life expectancy?
yes. There are several others. These include beneficiaries who are 10 years or younger of his age than the original owner of his IRA. Chronically ill or disabled persons, minor children who are not grandchildren of the original owner.
What if I inherited an IRA from someone who started taking an RMD after 2019?
You don’t have to get an RMD this year, but keep an eye out for final regulations on this issue. The account will need to be liquidated within 10 years, Slott said, so he needs to raise more money in a shorter period of time.
What if I inherit an IRA from someone who has not started taking an RMD?
Since you were not subject to the stricter RMD rules in the first place, the relief granted on Friday does not apply to you. However, the inherited IRA must be emptied by the end of the tenth year after the death of the original owner.
Email Elizabeth Obrien at elizabeth.obrien@barrons.com.
