IRS’S NOTICE PROVIDES RELIEF FOR IRA BENEFICIARIES
Last week the IRS issued IRS Notice 2022-53 related to Inherited IRA RMDs which I summarize below. Before we get into what the Notice says, let me provide a quick background on what they are clarifying.
The SECURE Act was passed in late 2019 and became law as of Jan. 1, 2020. Among other things, the SECURE Act imposed a 10-year payout rule for an individual beneficiary who is not an Eligible Designated Beneficiary (EDB) and who inherits after 2019. That rule required that the beneficiary empty the retirement account by the end of the 10th year following the year the account owner died.
On February 23, 2022, the IRS issued proposed regulations stating that if the account owner died on or after his RMDs began, the beneficiary would be subject to the 10-year rule AND would be required to take annual RMDs during years 1-9 of the 10-year period. That interpretation surprised most commentators who thought the 10-year rule would apply like the pre-SECURE Act 5-year rule, which did not require annual RMDs.
Last Friday (October 7, 2022), the IRS issued IRS Notice 2022-53 which I summarize below:
- The IRS will not impose the 50% penalty for missed inherited IRA RMDs in 2021 and 2022 that are subject to the SECURE Act 10-year payout period.
- The IRS said that a penalty on missed RMDs within the 10-year term will not be imposed until 2023at the earliest. If a beneficiary already paid the penalty for a missed 2021 RMD, the beneficiary can request a refund from the IRS.
- They have not officially decided what the regulations will be but have notified taxpayers of their intent to issue final regulations.
- While the IRS is waiving these RMDs for 2021 and 2022, they did not say whether these RMDs would be permanently waived, would be required to be made up in 2023, or whether the IRS will be content to not receive the deferred RMDs until year 10.
- It is important to note that the Notice does not affect lifetime RMDs, inherited IRAs by eligible designated beneficiaries (EDB) or RMDs by beneficiaries who inherited before 2020. Click here to learn more about the 5 categories of individuals who are considered EDBs.
I hope this helps you understand the Notice. Please note that just because a beneficiary is not legally required to take a distribution this year, that doesn’t always mean they shouldn’t in fact take a distribution. Many individuals could benefit from taking a voluntary distribution in 2022 to try and avoid a larger future distribution being taxed at a higher rate later on. An important tax planning rule is to try to pay taxes at the lowest possible rate. Our goal at Mainstreet is to help you make these important decisions so please reach out to your MainStreet advisor to help you choose what is best for you.
Ultimately, though, those 2022 distributions are a choice.