Updates to the SECURE Act have the potential to significantly affect anyone who has an Inherited IRA or Beneficiary IRA. Starting in 2020, those who inherited an IRA from someone other than a spouse, in most situations, have to withdrawal the entire value of the inherited IRA by the end of the 10th year after the year of death of the original IRA owner. This change to the law ended the “Stretch IRA” for non-spouses. The SECURE Act which became law on January 2022, and was updated a little more than a month later (Secure Act 2.0), shows the potential to significantly change how non-spouses treat inherited IRAs.
Here’s the story… Under the 10 year rule, the entire inherited IRA must be completely withdrawn by the end of the 10th year after the year of death for the original IRA owner. For the past two years, the entire financial industry has been of the opinion that annual RMD’s within the 10 year window were not required. However, the SECURE Act 2.0 is making financial planners scratch their head. The Secure Act 2.0 tells us if the original IRA owner died on or after his/her date they were required to be taking Required Minimum Distributions (RMDs) from their IRA then the person who inherits the IRA must also take RMDs within the 10 year window. Even though they are required to take RMDs they are still required to withdraw the entire value of the IRA within the 10 year window.
Pretty much everyone who has an inherited IRA from a non-spouse did not take an RMD for 2021. The IRS imposes a 50% penalty for missed RMDs (ie. if the RMD was $2,000 then the penalty for not taking the RMD is $1,000).
At the end of the day, so many people missed taking RMDs in 2021 because when the law changed in 2020 nobody was made aware of the requirement by the IRS to take the annual RMD. So, financial planners everywhere are hoping the IRS provides some guidance on this topic; financial industry lobbying groups are putting the pressure on the IRS to make a determination.
Nobody, and I mean nobody, knew the there were RMDs required within the 10 year window. Ultimately my hope is the IRS will waive the 2021 RMD on non-spousal inherited IRAs or they will require the 2021 RMD be taken and issue a blanket penalty waiver. Hopefully the IRS won’t require everyone to individually apply for a penalty waiver. Regardless of when the 2021 RMD is taken, if the IRS decides the 50% penalty will apply, there is accruing daily penalty so it is best to wait to take the 2021 RMD until the IRS provides some guidance, hopefully.
If you have an inherited IRA, which you did not inherit from a spouse, it is vital you bring this topic up with your financial planner and your CPA as it will require a team effort to coordinate this issue.
NOTE: The 10 year withdrawal rule does not apply to “Eligible Designated Beneficiaries” (EDBs). EDBs are spouses, children of the IRA owner under age 21, disabled or chronically ill individuals, and anyone not more than 10 years younger than the IRA owner. If you have fall into the description of an EDB it is best for you to discuss your individual situation with your financial planner and CPA.