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IRS Mulling Additional Changes for Non-Spouse Inherited IRAs
Published Date : April 29, 2022
April 29, 2022
Two years after making significant, often unclear and even confusing changes to Required Minimum Distribution (RMD) schedules for non-spouse inherited IRAs, the IRS recently issued a proposal with additional guidance, which may come as an unpleasant surprise to many. The proposal will likely not be finalized until later this year, but the following updates pertaining to non-spouse inherited IRA RMDs are being considered.
Congress passed the SECURE Act in 2019 which directed anyone inheriting a non-spouse IRA (for example, from a parent) as of January 1, 2020 to take the entire balance out within 10 years as a distribution, all subject to ordinary income taxes. This provision was implemented to expedite tax receipt of distributions. Previously, any IRA inherited before January 1, 2020 would allow a recipient to stretch distributions over their lifetime.
Because the 2019 rules provided no guidance on the timing of these distributions, many advisors, including us, did the best we could with this dramatic change. If a client was currently in a high tax bracket but was looking to retire within the 10-year period, we might have suggested taking larger RMDs toward the end of the 10-year period, after confirming with their CPA, to optimize distributions from tax and cash flow standpoints. With the IRS now saying distributions must be taken each year, they have removed any flexibility to mitigate what could be a large tax hit to those who do not need to take distributions.
With regard to inherited Roth IRAs, the 10-year rule is in place but there is no current proposal to require an RMD each year (inherited Roth IRA RMDs are not taxed).
These rules are currently in the “proposal” phase (so not currently required) but are a direct reversal from previous guidance. In May 2021, the IRS stated “annual RMDs would not be required under the new 10-year rule.”
What does this mean for those who did not take an RMD from an Inherited IRA that falls under the 10-year rule? They are exempt from any changes in 2020 since no RMDs were required that year. If they skipped an RMD in 2021, they should check with their tax professional who may tell them to take two RMDs now: one for 2021 and one for 2022.
Because this guidance is still in the proposal phase, we will be keeping a close eye on developments to make sure we are clear on distribution deadlines.
Sources: Forbes, Yahoo Finance, Kitces.com
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