RMD Rules For Inherited IRAs Remain Confusing
It used to be relatively simple. Prior to 2020, if you inherited an IRA from someone, rather than having to liquidate the account and pay taxes on the balance, you were allowed to “stretch” the annual required minimum distributions (RMDs) over your life expectancy. Then came the SECURE Act (2020) and the IRS interpretation of the SECURE Act (2022), and what had been a straightforward set of RMD rules became complex beyond belief. Presumably in recognition of the widespread confusion, the IRS recently issued Notice 2023-54 which provides some relief, at least for this year.
Previously the stretch rule above applied to any beneficiary other than a surviving spouse (for whom the choice of absorbing the deceased spouse’s IRA as their own was additionally allowed). The SECURE Act split that beneficiary group into two separate groups: Eligible Designated Beneficiaries (EDBs) – comprising surviving spouses, minor children, those who are disabled or chronically ill, and beneficiaries whose age is not more than ten years younger than the deceased – and everyone else (non-EDBs). Under the SECURE Act the stretch provision continued to apply to the EDB cohort, but a different rule was imposed on the non-EDBs: they were now required to deplete an inherited IRA account within ten years.
In February 2022 the IRS issued proposed regulations based on the SECURE Act. To everyone’s surprise, the IRS further bifurcated the non-EDB group into beneficiaries of IRAs for which the original owner had died before starting to take their own RMDs, and beneficiaries of those whose owner had already begun RMDs. The ten-year rule applied to the first cohort as specified by the act. That is, beneficiaries could wait a full ten years before withdrawing the assets and paying taxes on them or they could do it sooner, whichever they preferred. However, the IRS asserted that the latter cohort would not only be required to liquidate the account within ten years but at the same time also be subject to annual RMDs based on their age.
It’s not uncommon for new legislation to create confusing and even unworkable side effects or corner cases. Typically the solution is for politicians to introduce subsequent legislation to correct such mistakes. What’s unusual in this case is that Congress could have fixed the latter situation via SECURE Act 2.0 which was enacted into law at the end of 2022. But they failed to do so.
Since Congress didn’t act, it was left to the IRS to decide how to interpret the SECURE Act rules. And sometimes the IRS takes a long time before coming up with what they call final regulations. So what they did to eliminate any confusion about inherited IRA RMDs in 2022 was to waive them (IRS Notice 2022-53). That made it much easier for taxpayers and their tax accountants and financial planners who weren’t sure what to do.
It’s now late in 2023 and the IRS still hasn’t issued SECURE Act final regulations. So once again they kicked the can down the road by issuing Notice 2023-54, which among other things waives inherited IRA RMDs, this time for 2023. So for one more year all inherited IRA beneficiaries can skip distributions as was commonly understood (except by the IRS) from the SECURE Act.
At some point the IRS will come up with final regulations for inherited IRA distributions. For better or for worse, that will become the new rule. If a further fix is needed, Congress will have to step in.