By Dr. Jim Dahle, WCI FounderInherited IRA rules changed a few years ago, but Congress and the IRS did a terrible job of really communicating all of the new rules that occurred as a result of the SECURE Act. This is particularly true with regard to Required Minimum Distributions (RMDs). Two to three years later, the IRS was STILL changing the rules.
Changes with the SECURE Act
When you inherited an IRA prior to 2019, you had to start taking RMDs right away, usually based on your age. That allowed young inheritors to stretch the tax protection of an IRA out for many decades. The SECURE Act implemented the “10-year rule,” which required you to pull all of the money out of an inherited IRA within 10 years of the death of the deceased. However, what it did not specify well was whether you had to take anything out during years 1-9. In fact, there was a pretty good agreement that you did not have to take anything out at all until year 10. This is a big deal, because the penalty for not taking out an RMD is 50% of what you should have taken out—one of the steepest penalties in the entire tax code.
People came up with all kinds of strategies to take advantage of this new Stretch IRA. That usually meant leaving Roth money in there for the full 10 years. It also meant trying to take out tax-deferred money in the most tax-efficient way possible, i.e. in low-income years, spread out over a few years, and delaying withdrawals until late in the 10-year period.
Later Guidance on Required Minimum Distributions
But in February 2022—yes, more than three years after the law went into effect—the IRS clarified the rules in the form of “Proposed Regulations” which took away a few of those planning options.
- If the deceased was already taking RMDs from a tax-deferred IRA upon dying in 2020 or later, the beneficiary must start taking RMDs in the year after the death and continue for nine years before taking everything else out in year 10.
- If the deceased was not taking RMDs from a tax-deferred IRA, the beneficiary could avoid RMDs. They just had to have all of the money out of the account in year 10.
- If the inherited IRA was a Roth IRA, the beneficiary could also avoid RMDs and take all the money out in year 10.
Naturally, a lot of people were not happy about this so they let the IRS know. Imagine those people who didn't take out RMDS in 2020 and 2021 and now had to pay 50% penalties due to the rules changing after the fact.
The IRS relented, and in October 2022, it published IRS Notice 2022-53:
“Final regulations regarding RMDs under section 401(a)(9) of the Code and related provisions will apply no earlier than the 2023 distribution calendar year. IV.
Guidance for Certain RMDs for 2021 and 2022
A. Guidance for defined contribution plans that did not make a specified RMD A defined contribution plan that failed to make a specified RMD (as defined in Section IV.C of this notice) will not be treated as having failed to satisfy section 401(a)(9) merely because it did not make that distribution.
B. Guidance for certain taxpayers who did not take a specified RMD To the extent a taxpayer did not take a specified RMD (as defined in Section IV.C of this notice), the IRS will not assert that an excise tax is due under section 4974. If a taxpayer has already paid an excise tax for a missed RMD in 2021 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax.”
Basically, those who didn't take the RMDs they should have taken in 2020 and 2021 would not be penalized for not doing so. If you had already paid the penalty, you could get a refund of it.
More information here:
At What Age Do You Have to Take RMDs?
Eligible Designated Beneficiaries
The SECURE Act also created Eligible Designated Beneficiaries (EDBs) for whom even those rules don't apply. EDBs are:
- The owner’s surviving spouse
- The owner’s child who is less than 18 years of age
- A disabled individual
- A chronically ill individual
- Any other individual who is not more than 10 years younger than the deceased IRA owner
EDBs can withdraw their money over their own life expectancy, basically like the old Stretch IRA. There are two exceptions, though. The first is for the surviving spouse. The surviving spouse can roll the inherited IRA into their own. They can also continue the first spouse's RMDs. The second exception is for minor children. Once they hit 18, the 10-year rule kicks in.
Also, you should note that the SECURE Act raised the age you must start taking RMDs to 72 (and subsequently, SECURE Act 2.0 raised it to 73 and eventually 75).
More information here:
Understanding Required Minimum Distributions
Best Inheritances
Despite the accelerated RMDs under the New Stretch IRA rules, IRAs and Roth IRAs are still great things to inherit. A Roth IRA may be the best inheritance, and even a traditional IRA is better than an HSA, which is 100% taxable to the heir in the year of death.
Inherited IRAs also do not count toward the pro-rata calculation for the Backdoor Roth IRA.
My condolences if you have an inherited IRA, but if you understand the rules, you can still make the most of your loved one's generosity.
If you need extra help with planning for retirement or have questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
What do you think? Do you have an inherited IRA? What is your plan for it?
Did the SECURE Act proposed regulations that were in the Federal Register on February 24, 2022 (87 FR 10504), ever take effect?
Notice 22-53 just says “Final regulations regarding RMDs … will apply no earlier than the 2023 distribution calendar year. ” (Page 7, Section III; see also Page 1, Section I.)
I thought that the proposed regulations were never finalized and thus expired.
Not sure exactly which ones you’re referring to, but my understanding is they’re in effect.
My brother and I are getting conflicting advice from our accountants regarding our inherited IRA we received prior to 2019. One says the new 10 year rule applies and we need to vacate our account (this month) and the other says it does not apply and we can continue taking our RMDs moving forward and stretch the money as long as we want.
Perhaps one of you should be looking for another accountant.
This has become an utterly confusing topic and the IRS still doesn’t know how it will ultimately play out. My spouse inherited a IRA in 2020 and like many folks, we assumed the 10 year rule required a complete liquidation of funds by the end of year 10 (not yearly RMD). Fast forward to the first IRS clarification which you outline. Just this past year the IRS extended that relief and is still deferring any penalty for failure to take RMD in 2023. Now we all need to wait until 2024 to see what the final rules are. Will RMD be required for just 2024? Or will you be expected to withdraw the RMD for 2020-23 that were not taken due to the delay? Or will the IRS keep punting and finalize distribution rules that allow a more simple “take it out before year 10” as everyone originally interpreted? For the time being my spouse has yet to take a distribution and is trying to maximize the 10 years of tax free growth.
Oh and just a note that the other changes from SECURE 2.0 are to reduce penalties to 25% for missed distributions and then down to 10% if the missed distribution is made up within 2 years.
For those who want to get into the weeds a bit more, I found this analysis extremely helpful….
https://www.kitces.com/blog/irs-notice-secure-act-required-minimum-distributions-rmd-inherited-ira-beneficiaries-2023-2024/
This article mentions that IRS notice 2022-53 implies penalties apply to tax years 2022 and 2023, but IRS Notice 2023-54 says:
III. APPLICABILITY DATE OF FINAL REGULATIONS
Final regulations regarding RMDs under § 401(a)(9) and related provisions will apply for calendar years beginning no earlier than 2024.
Oh yes, you’re correct on that. Those penalties were waived.
IRS DOESNT CHANGE ANYTHING—IRS FOLLOWS THE RULES THAT CONGRESS PASSES. THE PPL THAT PPL VOTE INTO OFFICE CHANGE THE RULES—TELL THE PPL IN CONGRESS YOUR ISSUES—-IRS CAN’T DO ANYTHING—-YOUR VOTES COUNT
The IRS does implementation though, that’s worth something.
How do the new rule apply to non-eligible designated beneficiaries? I see information on eligible beneficiaries, but nothing on non-eligible beneficiaries.
Thanks
That’s kind of a vague question. Can you be more specific?
Can you go into this a little deeper. How about if you inherit a previous inherited IRA. Example: My wife inherits part of a IRA from her sister who passed away in 2018. She then passes away in 2021 and I, her husband, inherits that IRA. What are the RMD requirements?
Holy smokes. I think we’d need more info to sort that out. Are you really in that situation?
Yep.
So sorry for your losses. A year on from your comment, have you found the answer to this? A friend and I were wondering- me in case my spouse leaves our kids his mother’s old IRA, her in case her mother dies and leaves her an IRA and she then dies before emptying it.
Trying to understand all this has me convinced we should just empty his IRA ASAP up to the top of our tax bracket- displacing any Roth conversions by that amount.
NVM found my answer in the next post from Richard
Put the inherited IRA into a Fidelity account and talked to an advisor. They told me I fall under the 10 year rule. And they figure my minium for each year for me.
Depends – see info on successor beneficiaries:
https://www.kitces.com/blog/successor-beneficary-required-minimum-distribution-10-year-rule-secure-act-eligible-designated-beneficary/
I’m interested in post 2021 inherited Roth IRA RMDs for non “eligible designated beneficiary”. IRS says “Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts.” This post describes the proposed regulations ” If the inherited IRA was a Roth IRA, the beneficiary could also avoid RMDs and take all the money out in year 10.” My understanding is that RMDs cannot be avoided. Is any clarification possible?
Depends on when the person died, whether they were already taking RMDs, who the beneficiary is etc.
Here’s the IRS current guidance:
https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
but Fidelity has a really nice page that helps with this. For your category (inherited after 2021, non EDB, presumably not taking RMDs before, it says this:
https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
I read somewhere that the money from an inherited IRA can be withdrawn tax free if used for a child’s education expenses (ie. College tuition). Is this accurate? My wife inherited her father’s IRA. Our son will be in college in 4 years. We have been debating how best to use this money.
I don’t think that’s true. Education withdrawals from IRAs can be penalty free but inherited IRAs already provide penalty free withdrawals. Might still be a great use for the money though. You could also pull it out now, pay the taxes, and put it in a 529.
Ok, so i am a designated beneficiary (but not an eledgable one ). I in herited a traditional IRA from my mother in 2022. She had been taking annual RMDs and did so in 2022. I read in publication 590 that i must follow the 10 Year rule. In the instructions for the 10 year rule (page 10-11), there is an example that seems to fit my situation, same year of death. It says I “may” take an annual RMD, but I am “not required” to take an RMD. Is that wording incorrect or has that wording changed in the October notice.
From the excellent Fidelity page: https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
I think you better take an RMD for 2023 but I don’t think you missed one in 2022. Kind of interesting that you can do it based on either her or your life expectancy isn’t it?
This one is so confusing. We’ve been told different answers on this one. My spouse and her sibling (designated beneficiaries) inherited an IRA 50/50 from their parent in 2022. The parent had already begun taking RMDs. In 2022, the holding institution did an RMD distribution from the IRA to my spouse before end of year. We finally gained control/access of the account (post-probate settlement) this Fall. Now we’re getting conflicting information on whether or not we have to or not we have to again in 2023 due to the IRS ruling that delayed the guidance to 2024. We don’t have any special circumstances and will be on the 10 year rule. Are we required to take out an RMD in 2023? Will we be penalized if we don’t (our preference for this year)?
Why risk it? Taking an RMD is no big deal. You’re just investing a little more in taxable and a little less in the IRA. Not taking it is a big deal with a big old penalty. At any rate, I’m just using that Fidelity link above to answer all these questions. Here’s your answer:
https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
Sounds to me like you need to take the RMD. I don’t think the IRS delay is worth counting on.
I also inherited a traditional IRA in 2022 from a parent that was taking RMDs. As is the case for the person posting above, I also prefer not to take the RMD in 2023 as my income this year is greater than it will be in the next 9 years during which I have to deplete the account.
For this situation I find multiple people online saying that the IRS has said they will not be fining those not taking an inherited IRA RMD for tax year 2023, which effectively makes it unnecessary:
“ Designated beneficiaries who inherited in 2020 or later, from an IRA owner who died after reaching his or her RBD. These are beneficiaries who are not EDBs, so they are subject to the 10-year rule under the SECURE Act. Since they inherited from someone who died after their RBD, they are subject to RMDs for years one through nine of the 10-year term. However, the IRS, recognizing the confusion created by these rules, has said that anyone in this category (originally subject to annual RMDs under the 10-year rule), will not have to take RMDs in 2021, 2022 or 2023. There will be no RMD penalty for missing these RMDs, so they don’t have to be taken. Better yet, they won’t have to be made up in future years. However, the entire balance in the inherited IRA must still be withdrawn by the end of the 10th year after death. “ (https://www.investmentnews.com/how-to-unravel-complicated-2023-rmd-rules-244743).
There are many other credible websites that say the same thing and all refer to this from the IRS:
https://www.irs.gov/pub/irs-drop/n-23-54.pdf
Thanks for sharing. I’m not sure that was published when I wrote this post and that’s probably why I didn’t mention it. It would be easier to explain the rules if they would quit changing them every few months.
Sounds like there are “the rules” and then there are “THE ACTUAL RULES” in this case.
My spouse passed away in October and I will be inheriting his Traditional 403B. I am considering Fidelity to diversify even though my taxable account is at Vanguard. Can I leave it as an Inherited IRA in either of those two brokerage houses until I’m ready to access it? I’m only 55. It’s all in a 2030 Vanguard Target fund so I may change that to the 2035 Target fund and I’m hoping I can do roth conversions on it when I’m retired and in a much lower tax bracket. I have a terrible 401K at my office with high fees so I wouldn’t want to roll it into that. Thank you.
Lots of options when you’re the spouse. You can move it into your own IRA, keep it as an inherited IRA from your spouse etc. Keep in mind if you make it your IRA and don’t roll it into your 401(k) that you’ll have pro-rata issues with the Backdoor Roth IRA process.
Thank you. I don’t have any IRA’s anymore because I do the backdoor roth once a year. Any negatives to keeping it as an inherited IRA? It’s currently with Empower so maybe I can leave it there after researching the fees as compared to Fidelity or Vanguard.
My understanding is that I’m exempt from having to take money out or emptying it out at the 10 year mark.
Yes, there are positives and negatives to both approaches.
If you leave it in an inherited IRA, it doesn’t count toward your prorata calculation for your backdoor Roth IRA. But RMDs may apply where they wouldn’t in your IRA. The RMDs can be taken based on your spouse’s life expectancy or
Move inherited assets into an Inherited IRA in your name. Withdraw an RMD from the account based on the longer of the beneficiary’s age or the age of the original owner in the year of their death using the Single Life Expectancy table in each of the first 9 years since the original depositor’s passing. Withdraw the balance of the account by December 31st of the year containing the 10th anniversary of their passing.1,2
1. If you didn’t move your inherited assets into an Inherited IRA in your name in a timely manner, you may have missed taking an RMD in one or more of the years of the 10-year time period you have to completely draw your account down to zero. Consult with a tax advisor to learn if and how you need to satisfy a missed RMD in this situation.
2. As a spouse beneficiary you may use the longer of your life expectancy or the life expectancy of the original owner. If you elect to use the age of the original owner to calculate RMDs, the full balance of the account must be distributed when your life expectancy factor as the beneficiary is less than or equal to 1.
https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
The irs expanded the waiver to 2023 in the summer.
I need a good article on the prorata calculation of my back door Roth. Can you explain it please. If I have a million in a 401k can I convert 50k per year?
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
https://www.whitecoatinvestor.com/roth-conversions/
There’s a difference between the Backdoor Roth IRA process (a non-deductible IRA contribution plus a Roth conversion that is governed by the pro-rata rule) and just doing a Roth conversion. You sound like you’re talking about just doing a Roth conversion with a tax bill using some of your 401(k). Not really the same thing or purpose. Read the articles linked above and it should become clear. Let me know if not.