The Internal Revenue Service allows people who inherited an individual retirement account after 2019 to skip the required minimum distribution this year, but most still have to empty the account within 10 years.
The IRS released the new guidance Friday.
Confusion over the rules for inherited IRAs has arisen since the SAFE Act of 2019 eliminated the so-called “stretch IRA” for most non-spouse beneficiaries. The old rules allowed beneficiaries of inherited IRAs to extend their required minimum distributions over their lifetimes, allowing for decades of tax-free or tax-deferred growth in some cases.
Under the SAFE Act of 2019, most non-spouse beneficiaries must now empty their inherited IRA by the end of the 10th year after the original owner’s death. When the law was first passed, experts interpreted it to mean that the entire amount could be withdrawn in year 10 if desired, said Ed Slott, a certified public accountant and founder of IRAHelp.com.
However, in early 2022, the IRS proposed stricter rules that would apply to someone who inherited an IRA from someone who had already started taking RMDs; then the recipient must continue to make distributions on an annual schedule. In other words, if the RMD faucet was already on, Slott says, it couldn’t be turned off after the original owner’s death, and the beneficiaries would have to continue withdrawing each year and paying income tax on the amount withdrawn. “It was shocking,” says Slott.
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Because of the delay in that proposal and general confusion about the rules, the IRS effectively abandoned that annual requirement on Friday.
Here’s what the latest IRS guidance means for you:
What if I inherit an IRA before 2020?
The new rules don’t matter. You’ve got the so-called stretch IRA rules that were in place before the law was passed. The relief announced Friday also doesn’t apply to you, so if you have an RMD scheduled this year, you still have to take it.
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What if I inherited an IRA from my spouse?
None of the changes apply to spouses, who enjoy much more flexibility when inheriting IRAs. You can roll over your spouse’s IRA into your own retirement account and or keep it as an inherited account. Either way, you can spread distributions based on your life expectancy, not 10 years.
Are there other beneficiaries who can take RMDs based on their life expectancy?
Yes! There are several more. They include: beneficiaries who are no younger than 10 years younger than the original IRA owner; those who are chronically ill or disabled, and minor children, not grandchildren, of the original owner.
What if I inherited an IRA after 2019 from someone who started taking RMDs?
You don’t have to take an RMD this year, but stay tuned for the final regulations on this matter. The bill has yet to dry up in 10 years, so more should come out in a shorter window, Slott says.
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What if I inherited an IRA from someone who hadn’t started taking RMDs?
Friday’s exemption doesn’t apply to you because you weren’t subject to the tougher RMD rules in the first place. However, you still must empty your inherited IRA by the end of the 10th year after the original owner’s death.
Email Elizabeth O’Brien at elizabeth.obrien@barrons.com
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