Financial Insights

What to know if you inherited an IRA after 2019

The IRS recently issued Notice 2023-54, which focuses only on designated beneficiaries (primarily adult children) who inherited IRAs (not including Roth IRAs) after 2019, and where the owner died on or after the date they were supposed to start taking required minimum distributions (“RMDs”).

Per the SECURE Act, a designated beneficiary who inherits an IRA after 2019 must distribute it by the end of the 10th year after the owner’s death AND annual beneficiary-RMDs are also required in years 1-9 if the owner died on or after the date they were required to start taking their own RMDs.

These provisions don’t apply in the event that a spouse inherits an IRA because a spouse can inherit an IRA from his/her deceased spouse, treat it as their own, and continue RMDs over the own life-expectancy (i.e., spouses don’t have to distribute an IRA within 10 years).  There are a few other exceptions to the 10-year rule too.

If this all sounds complicated, then you’re right, it is!

Lots of people were confused by the SECURE Act requirements.  As a result, and in response to complaints during the comment period for the proposed SECURE Act RMD regulations, the IRS published Notice 2022-53, in which they waived the 50% excise tax on RMD failures for designated beneficiaries who inherited traditional IRAs in 2020 and 2021 and were required to take annual RMDs.  The translation for us regular folks is that the years 1-9 RMDs were not required in 2021 and 2022.

IRS notice 2023-54 extends this provision by one year, meaning the excise tax (reduced from 50% to 25% as of 2023) is automatically waived for 2021, 2022 and 2023.

Q:  Is this an RMD waiver?

A:  No.  The excise tax is waived.

Q:  Will a designated beneficiary be required to make-up the missed RMDs in 2021, 2022, 2023 in 2024?

A:  No

Q:  Does this extend the 10-year period?

A:  No.  The deadline for fully distributing the IRA is still the 10th year after the year of the IRA owner’s death.

Example:  Judy inherited a traditional IRA from her 85-year-old mother, who starting taking RMDS in 2005 when she turned 70.5 years old, and who died in 2020.

Because Judy’s mother died after her RMDs started, the SECURE Act states that Judy must start taking her year 1-9 RMDs beginning in 2021 and Judy must completely distribute the IRA on whatever balance remains in 2030 (the 10th year).

The IRS Notices mentioned above clarify that year 1-9 RMDs are not required for Judy in 2021, 2022 & 2023.   As is stands today, Judy will be required to take an annual RMD in 2024 and each subsequent year until she completely distributes the IRA by December 31, 2030.

The question for Judy, and any other designated beneficiaries who inherited an IRA after 2019, is whether they should still take an RMD or some other amount in 2023 anyway, considering that the full amount of the IRA still has to be distributed in the 10th year.

Not taking the RMDs for 2021, 2022, & 2023 means bunching up distribution amounts over the remainder of the required 10-year period.

In this case, Judy has seven years left to distribute the IRA.  If Judy takes the minimum amount each year from 2024-2029 and waits until 2030 to distribute the majority of the IRA, then this could potentially create significant income and a large income tax bill in 2030.  This could complicate how much of her Social Security benefit is taxed in 2030 or impact her Medicare Part B & Part D premiums in 2032.

The rules on inherited IRAs are complicated, so if you are in this situation or know someone who is, then reach out to your ACM Wealth Advisor.  Your ACM Wealth Advisor is familiar with these regulations and work with you to help you determine when you may want to take your distributions within the 10-year required time period.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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