Recently, legislation updated the Required Minimum Distribution (RMD) rules for non-spousal beneficiaries. As of 2020, the SECURE Act mandated that a non-spouse (i.e., a child, another family member, or friend) who inherited an IRA would have to fully withdraw the funds within a 10-year period. This was a huge departure from the previous rule, known as the “stretch IRA,” which allowed a non-spousal beneficiary to stretch distributions over their lifetime.
While the SECURE Act implemented a new timeframe on those inherited IRA funds, it was widely understood that annual required minimum distributions were not required: A non-spousal beneficiary could defer taxes up until the 10th year if they wished and pay taxes on that lump sum. In 2022, however, the IRS and U.S. Treasury challenged that interpretation, saying that RMDs were meant to be taken by non-spousal beneficiaries in years 1-9, with the remaining funds to be fully taken in year 10.
RMD timeline confusion led to delayed guidelines by the IRS
Because so many beneficiaries were confused by the clarification given by the IRS, the agency issued a notice stating they would not enforce those RMD rules for the 2021 and 2022 tax years. However, it is expected that RMDs will start for non-spousal beneficiaries in 2023.
Should non-spousal beneficiaries take an RMD on their inherited IRA right now?
Just because there is a delay in taking an RMD until the 2023 tax year doesn’t necessarily mean that non-spousal beneficiaries should forgo taking distributions. This is where tax projection strategy meetings with your financial advisor and tax professional can be helpful in figuring out what would be the best option for your financial situation.
Have you inherited an IRA recently?
If you are wondering what you should do about an IRA you may have recently inherited, we’re happy to discuss your options with you. Keep in mind that while deferring your taxes until the 10th year may be the right decision for some; for others, doing so may result in unforeseen tax complications and may ultimately force tax payers into a higher tax bracket than they normally might have been in. Contact us to examine your personal financial and tax situation, and we will help you evaluate the strategies available to you.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.