A Sigh of Relief for Beneficiary IRA Owners

Meeting Internal Revenue Service (IRS) requirements for required minimum distributions (RMDs) is of utmost importance for owners of traditional IRAs considering that a burdensome 50% penalty is levied on any undistributed portion of yearly RMD amounts.

However, this has become increasingly troubling in recent years as the Secure Act, passed in December 2019, introduced significant changes to the distribution rules for non-spouse beneficiaries of traditional IRAs whose original owner passed away after December 31, 2019. This act effectively put an end to the use of “stretch IRAs”, an inherited IRA in which the new owner was permitted to defer taxability by basing the RMD calculations using their own life expectancy. Instead, the Secure Act introduced new requirements for non-spouse beneficiary IRA holders to fully distribute funds held in traditional IRAs by the 10th year following the year of the owner’s death. For many, these funds may be taken at any time within the 10-year window. However, beneficiaries will be required to take distributions in years one through nine if the original owner died following their required beginning date for RMDs. Provided that the IRS is still drafting final regulations for these rules, advisors and beneficiary IRA holders alike have been awaiting guidance as to 2021-2022 RMD requirements and potential penalties for having missed these distributions. 

Notice 2022-53, released in early October by the Internal Revenue Service, provided necessary guidance for beneficiary IRA holders regarding such concerns. While final regulations regarding the distribution rules for such accounts are not complete, the IRS advised that they are soon to come. In the meantime, Notice 2022-53 clarified that non-spouse beneficiary IRA holders may waive their 2021-2022 RMDs, provided the original owner passed before their required beginning date, and that the 50% penalty for undistributed funds will not be levied. As a result, the earliest RMD date for such beneficiary IRA holders would occur in 2023. Some important considerations arise from this communication by the IRS. First, a common goal of individuals and advisors is to pay taxes at the lowest rate possible. Accordingly, it may be advantageous for beneficiary IRA holders to take 2022 RMDs, although not required, to avoid being pushed into higher tax brackets in future years. Secondly, increasingly complex distribution requirements set forth by the IRS leads to important beneficiary designation concerns. Aging account owners with relatively little funds remaining in their traditional IRAs may want to reconsider beneficiary elections as to limit the complexity of account separation and distributions for their heirs. Finally, the IRS may issue refunds to beneficiary IRA owners who paid the 50% excise tax on specified RMD amounts for 2021 prior to Notice 2022-53’s release. Notice 2022-53 provides an opportunity for non-spouse beneficiary IRA holders to prepare accordingly for potential 2023 distributions, and as always, we at Schneider Downs Wealth Management Advisors recommend coordinating with your financial professional to learn how changing rules and regulations may affect your personal financial situation. 

View Notice 2022-53 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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