In 2019, the SECURE Act changed how inherited required minimum distribution (RMD) rules work and added a new 10-Year Rule. Most professionals thought they knew how the new 10-Year Rule worked, but in February 2022, the IRS released proposed regulations which were a shock to everyone. To help taxpayers waiting for final guidance, the IRS waived penalties for failing to take a 2021 or 2022 inherited RMD in an October 2022 notice. They also noted that whatever the new rules are won’t take affect until 2023 at the earliest.
Since then, we have been waiting for final guidance on how to handle 10-Year Rule Inherited RMDs for 2023 onward.
In October 2022, we published the article “The IRS Waives 2021 & 2022 Penalties Because Its Unclear How the New Inherited IRA 10-Year Rule Works.” Then, in May 2023, we published the article “No Guidance on 10-Year RMD Stretch Despite Headlines“.
On Friday, July 14, 2023, the IRS released Notice 2023-54 . This notice did not offer the final guidance we were hoping for, but rather continued to push the decision further down the road.
The IRS Delays Final Regulations to 2024 or later
In Section III of this notice, the IRS States:
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.
The IRS Waives Penalties for 2023
In addition to delaying any final guidance, the IRS waived any penalties for 2023 inherited RMDs related to the 10-Year required distribution rule. The relevant section reads:
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 V.C of this notice), the IRS will not assert that an excise tax is due under § 4974.
C. Definition of specified RMD. For purposes of this notice, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to § 401(a)(9) in 2023 under a defined contribution plan or IRA that is subject to the rules of § 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
• a designated beneficiary of an employee under the plan (or IRA owner) if:
(1) the employee (or IRA owner) died in 2020, 2021, or 2022, and on or after the employee’s (or IRA owner’s) required beginning date, and
(2) the designated beneficiary is not using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii); or
• a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to § 401(b)(5) of the SECURE Act) if: (1) the eligible designated beneficiary died in 2020, 2021, or 2022, and (2) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under § 401(a)(9)(B)(iii) of the Code
While we are glad that there will be no penalties for failing to take an RMD in 2023, we continue to wonder what will be decided, when it will be decided, and what we should do for 2024 and onward.
While we won’t know with any certainty until the IRS publishes their final guidance, it is likely that Inherited IRA owners will be required to take distributions if they inherited their accounts from an original owner who had already started RMDs and died in or after the year 2020.
For now, those who were prepared to begin distributions in 2023 can stand down. Now, we recommend waiting for the final guidance but being prepared to begin distributions in 2024.
We will continue to monitor the IRS guidance on this matter. If you’d like to stay updated on our latest understanding of this issue, you may enjoy subscribing to our newsletter.
It is important to note that we are not tax professionals. As always, if you have any tax questions, the best advice is to consult with your tax professional.
Photo by Allyson Beaucourt on Unsplash. Image has been cropped.