What to Expect With Your Inherited IRA
When it comes to inherited IRAs, there are certain withdrawal rules that are important to understand, and the IRS has recently clarified their position in Notice 2022-53. The 10-Year Rule was put into place with the Secure Act of 2019, stating that certain heirs must deplete their inherited retirement accounts within a ten-year period. In this article, we discuss to whom the 10-Year Rule applies, how Notice 2022-53 affects the 10-Year Rule, and other factors to be aware of as they relate to required minimum distributions (RMDs) on inherited IRAs.
If the Decedent Died After 12/31/2019
It is important to note that if the recipient is an “eligible designated beneficiary,” they are not subject to the 10-Year Rule and can “stretch” RMDs over their own lifetimes. An eligible designated beneficiary can be one of the following:
- A spouse
- Someone who is disabled or chronically ill
- The minor child of the Decedent
- Someone less than 10 years younger than the decedent at time of death
If the recipient is not an “eligible designated beneficiary,” they are subject to the 10-Year Rule. There are then two ways the 10-Year Rule applies and depends upon:
- If the decedent had reached their required beginning date at date of death: The IRS’s view is that RMDs must be taken every year by the recipient AND the account must be fully distributed by the tenth year.
- If the decedent had not reached their required beginning date at date of death: There is no requirement on the recipient to take annual RMDs – the only requirement is that the account be distributed in full by the tenth year.
The required beginning date is the first of April in the year following the year that the Decedent turns 72.
Implications of Notice 2022-53
For those recipient’s required to take annul RMDs under the 10-Year Rule, the IRS has stated in Notice 2022-53 (issued October 2022) that recipients will now not be required to take RMDs for years 2021 and for 2022 only - i.e., in scenarios where the Decedent died in 2020 or 2021. The IRS has effectively acknowledged that the introduction of the 10-Year Rule was both flawed and confusing, and they are giving recipients who are subject to the new 10-Year Rule a “free pass” on RMDs for 2021 and 2022.
Year of Death RMD – What to Be Aware Of
In the case that the Decedent was already taking RMDs and died without taking part, or all, of their RMD for the year of death, the recipient of the IRA must still take any shortfall in the RMD for the year of death. This rule has always been applicable for the year of death and is not part of the concession announced in Notice 2022-53. The Year of Death Rule applies only to the shortfall in the year of death RMD, if there is one. This year of death shortfall RMD can be taken by the recipient up to April 15 in the following year.
If the Decedent Died Before 1/1/2020
If the Decedent was not taking RMDs when they died (under 70½ years old), there are two options for taking distributions:
- The Life Expectancy Method: must take an annual RMD based on the recipient’s own life expectancy; this is referred to as a “stretch” IRA
- The Five-Year Rule: distributions of any amount, or none, are allowed at any time up until December 31 of the fifth year after the year Decedent died, at which time all assets must be fully distributed.
If the Decedent was already taking RMDs (over 70½), method number one, the Life Expectancy Method, must be utilized, as the Five-Year Rule option doesn't apply.
For more information, view our flowchart, Can I Delay Distributions from the Traditional IRA I Inherited? To speak with a tax expert and discuss your unique scenario in more depth, please contact BakerAvenue.