The Internal Revenue Service has once again stepped in to provide assistance to taxpayers who have inherited retirement accounts in the wake of the distribution changes made by the original Setting Every Community Up for Retirement Enhancement (Secure) Act and subsequent regulations.
The current distribution process governing non-eligible designated beneficiaries who inherit retirement accounts has proved to be both surprising and confusing. While the IRS has now offered relief for the fourth year in a row, taxpayers who are subject to the new rules should be advised with the big picture in mind. Delaying their distributions can offer current-year tax relief, but that may not be best for clients when their overall tax liability is considered.
The IRS has not given any indication as to whether it might scrap the RMD requirement for years one through nine entirely, so taxpayers should prepare to eventually take those distributions.
Secure Act Inherited Account Changes
Before 2020, retirement account beneficiaries could elect to stretch distributions from those inherited accounts over their own life expectancies. The Secure Act eliminated that option for most non-spouse beneficiaries.
Now, beneficiaries who inherit retirement accounts must empty those accounts within 10 years of the original account owner's death unless the beneficiary qualifies as an eligible designated beneficiary.
Under regulations that were proposed in 2022, the IRS interpreted the rule to require annual RMDs for non-eligible designated beneficiaries during years one through nine of the 10-year distribution period if the original account owner was already subject to the required minimum distribution rules at the date of death. Most had expected that beneficiaries could elect to take the entire account balance in year 10 if they choose.
IRS Waivers and Relief
Since the proposed regulations were released, the IRS has provided relief for beneficiaries each year by excusing those RMDs. Notice 2024-35 waives RMDs in 2024 for beneficiaries of accounts when the original owner died after the required beginning date and the beneficiary inherited the account in 2020, 2021, 2022 or 2023.
