Those of you that are regular readers of our weekly newsletter, have seen a few of our blogs on the proposed regulations pertaining to Inherited IRA’s.
Here’s the deal
Prior to 2020, if one died, and the beneficiary was not a spouse (or a couple other exemptions), the named beneficiary had to take Required Minimum Distributions based on their own life expectancy.
This was a pretty good deal in my opinion as it allowed the beneficiary to “stretch” the required minimum distributions over their life. Potentially decades allowing for tax deferred growth.
The only taxable portion was what was taken out each year and the balance remained “protected” in this tax deferred IRA.
The beneficiary could always take more each year. (They could clean the whole account out if they chose) but whatever came out, would be taxed at ordinary income tax rates.
The same rules applied to Roth IRAs except for one key factor. Money coming out of the Inherited Roth IRA came out tax free. An even better deal.
Okay, let’s jump ahead to what happened next.
The SECURE ACT was passed by Congress in December of 2019 and that caused some confusion.
One major change was Required Minimum Distributions weren’t required until age 72 up from age 70. (This did not apply to one that inherits an IRA but only to the owner still living).
The other big change took away the “distributions over your lifetime” for a non-spouse (and some other non-spouse exceptions) that inherits an IRA and instead, says the IRA must be empty by the 10th year of the account owner’s passing.
Then the confusion began
It was further interpreted that if one passed away AFTER their required distribution date, the beneficiary would not be able to wait until the 10th year but would rather be required to take money each year based on their life expectancy and then have the account empty in the 10th year.
If one wasn’t at their required beginning date when they died, the original 10 year rule was in effect.
Jump ahead to October 7th of 2022
The IRS released Notice 2022-53 (Click on it for some riveting reading) addressing the 10-year rule and how the required minimum distributions pertain to beneficiaries inheriting after December 31st 2019.
My colleagues and I have been waiting for clarification on this matter as we didn’t have a solid answer to give our clients.
If a distribution was required under the SECURE ACT, then we would want to make sure we took that distribution to steer clear of the 50% IRS penalty imposed on those that are required to take a distribution that don’t.
This 50% penalty is over and above any taxes so you can see why we don’t want to miss these distributions.
The good news is, under IRS Notice 2022-53, required minimum distributions are waived for 2021 and 2022. If the IRS comes back with new guidelines, they won’t apply until 2023 or later.
Even though they are waived, one can still take distributions if they like. This could be a smart move if one is in a temporary lower tax bracket in 2022.
There will be updated regulations coming our way but for now, we can breathe a sigh of relief.
Feel free to reach out to me if you have any questions. I’m here to help.
Here’s another blog article that might be of interest. Don't Pay Taxes Twice
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.