While heirs have been waiting for clarity on the 10-year rule for inherited IRAs, the IRS recently released guidance allowing heirs to skip RMDs in 2023.
Moving the goal post
In December 2019, the SECURE Act was signed into law introducing a new 10-year distribution rule on most non-spouse inherited retirement accounts.
The current rule applies to accounts in cases where the owner died after 2019. Non-spouses (with limited exceptions) are required to fully distribute the inherited account by the end of the 10th year following the year of death of the owner.*
Spousal beneficiaries still have the option of treating an inherited retirement account as their own or basing required distributions on their remaining life expectancy.
The prevailing interpretation of the statute was that heirs had to fulfill the 10-year requirement to distribute the account, but were not required to take annual distributions during that 10-year period. They had the flexibility to use the 10 years as they chose, as long as the account was distributed by the end of the 10th year following the owner’s death.
However, in February 2022 the Treasury Department issued proposed regulations clarifying how the 10-year rule would apply on inherited retirement accounts. In short, if the account owner died after reaching their required beginning date (RBD), the beneficiary would be required to (at least) take minimum distributions based on their life expectancy for the first nine years of the 10-year period, followed by a full distribution by the end of year 10.
For more details on the proposed regulations, see our post, "Changes to 10-year rule could surprise retirement account heirs."
Given the pending status of the proposed regulations, the IRS issued Notice 2022-53 in October 2022 to offer interim guidance. It states that no penalty would apply to those who inherited retirement accounts after 2019 where the owner died post-RBD and didn’t take an annual distribution in 2021 or 2022.
For 2023, heirs subject to the 10-year rule have not been sure if they should take a distribution for this year while the regulations are still pending. On July 14, 2023, the IRS issued Notice 2023-54, which extends Notice 2022-53 to the end of 2023. As a result, those who inherited an account will not face a penalty if they don’t take an RMD in 2023.
While heirs may not technically need to take a distribution for 2023, some may need access to the funds or find that it may be more advantageous from a personal tax perspective to withdraw some funds this year. Also, it’s important to note that these IRS Notices do not extend the timeline for taking distributions, they only allow heirs to skip distributions for 2021, 2022, and 2023 while the proposed regulations are not yet finalized. For example, an heir of an IRA where the original owner passed away in 2021, and is subject to the 10-year rule, still has to distribute the account before the end of 2031.
It’s important for those inheriting a retirement account to consult with a financial professional to determine a distribution plan that makes sense for their particular situation.
For more information on planning strategies related to the 10-year rule see “Distribution planning under the SECURE Act.”
*Some non-spouse beneficiaries are not subject to the 10-year rule and can base required annual distributions on their life expectancy. These exceptions include heirs who are chronically ill, disabled, not more than 10 years younger than the deceased account owners, and a minor child of the deceased account owner.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.