The Tax Blotter is a round-up of recent tax legislation and rulings.
Under recent tax legislation, individuals who inherit IRAs must take annual required minimum distributions (RMDs) over ten years.
Take exception to the rules. Beginning in 2020, new rules apply to those who inherit an IRA. Generally, the beneficiary is required to empty out the account within ten years. This effectively eliminates new “stretch IRAs” that could last for generations. However, there are key exceptions for “eligible designated beneficiaries” (EDBs) such as surviving spouses, minor children (until they reach the age of majority), the chronically ill or disabled and beneficiaries who are not more than ten years younger than the decedent.
Hurry up or wait. When the tax law change was enacted, it caused a lot of confusion among taxpayers and tax professionals alike. It wasn’t clear if someone who inherited an IRA after the participant had started taking RMDs had to continue RMDs each year over the ten-year period. The IRS has just issued final regulations that clarify that RMDs must be taken every year. However, if the participant had not yet started RMDs, the beneficiary may wait until the tenth year to pull out all the money.
No going back. During the pandemic, the IRS waived the penalty for failing to take RMDs. This eventually included the tax years spanning 2021 through 2024. So, do individuals who inherited IRAs now have to go back and take RMDs for those years? Fortunately, the IRS says “no.” Under the new final regulations, you count the ten-year period as usual, but you don’t have to make up for the missed years. For example, if the decedent died in 2021, a beneficiary must start taking RMDs in 2025 and wrap things up by 2031.
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