The Internal Revenue Service on Friday said it would continue to delay enforcing new rules related to inherited retirement accounts, enabling some inheritors to forgo taking a required distribution for 2023.
The confusion for inherited IRA owners comes after Congress changed the rules for inherited retirement accounts in 2019. From then on, most taxpayers other than spouses who inherit accounts had to empty the funds within 10 years, not over their lifetimes, as was previously allowed.
The upshot is that some inheritors subject to the new 10-year payout window don’t have to take required minimum distributions for 2023.
Many inheritors have been waiting for final IRS rules on the 2019 retirement law for many years. Now, they have clarity on 2023, though they will have to keep waiting for longer-term guidance given these inheritors still have to empty their accounts in the 10-year window.
The main question for these inheritors is whether they will be forced to take annual withdrawals over the rest of the 10-year period or can wait until the 10th year to pull out the money.
Leaving the money in the account for longer could provide thousands of dollars in tax advantages. There is both the ability to get more tax-deferred growth and potentially to delay annual withdrawals until lower income years. Withdrawals from inherited retirement accounts are treated as income by the IRS.
The new guidance doesn’t say that the annual required minimum distributions are waived, but by offering penalty relief, it essentially means that this group of taxpayers doesn’t have to take RMDs for 2023, an IRS spokesman said.
Complicating the decision for inheritors, in February of last year, the IRS proposed rules mandating heirs make annual withdrawals during that 10-year period in cases where the original owner was already subject to RMDs.
In October, the IRS said these heirs wouldn’t owe penalties if they skipped distributions in 2021 or 2022 because of the confusion. The new guidance extends that relief to 2023.
The penalty for failing to take required IRA payouts is assessed at 25% of the amount that should have been taken out.
Some taxpayers have been asking if they will have to catch up on skipped distributions once the IRS says they have to start up again, said Denise Appleby, an IRA consultant in Grayson, Ga.
“They wouldn’t dare come back and say you’ve got to play catch-up,” Appleby said.
This guidance doesn’t change the rules for spouses and certain other beneficiaries known as eligible designated beneficiaries, including the chronically ill, who generally must still take annual withdrawals over their expected lifetimes.
Heirs who inherited accounts before 2020 are still subject to the old rules, which means they generally must take annual withdrawals over their expected lifetimes.
This article was originally published in The Wall Street Journal on July 14, 2023, and written by Ashlea Ebeling. Image courtesy of Ting Shen for The Wall Street Journal.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.