When the Secure Act was passed in 2019, it eliminated the ability for most non-spouse beneficiaries to “stretch” inherited retirement account withdrawals across their life expectancy and thereby spread out the potential tax liability.  You are now required to deplete the inherited retirement accounts within 10 years and pay the potential tax over that shorter time frame.  This rule is effective for accounts inherited after January 1^st, 2020.  If you inherited account before that date, you may still stretch out the withdrawals.

The Secure Act seemed to suggest that you must take Required Minimum Distributions from your IRA in addition to the 10 year depletion, but it was not clear.  Now that we are in 2022, many people have delayed taking those withdrawals for two years, waiting for clarity from the IRS!  This could be an expensive problem.  Normally, if you don’t take your Required Minimum Distribution from your inherited retirement account, the IRS levies a 50% excise tax on the amount not distributed!  Do all these heirs owe the accrued penalties from the last two years?  That could be a huge tax bill!  The IRS has finally provided an answer, at least for those two missing years by issuing Notice 2022-53.  But unanswered questions remain.

The New Rule

As a result of this confusion, the IRS has waived that 50% excise tax for the first two years, but the penalty is back in-force for 2023 unless they change it again.  The IRS did not provide any clarity on whether RMDs are required in 2023 or future years though.   -Update:  The Secure Act 2.0 passed in December with close to 100 changes to retirement account rules, but neglected to update this rule!

What Next?

The rule for 2023 is still unclear, but Congress may change that.  We do know that the IRS did not reset the 10-year period, and consequently the clock is now at eight years and going on seven for 2023.  Many heirs should consider making withdrawals in 2023 so that you don’t bunch up future withdrawals in an even shorter time period and land in a higher tax bracket.

For our clients, we will be contacting you to discuss the 2023 requirements and whether they apply to you, and the tax liability they may create.  We can also discuss a distribution schedule that minimizes your income taxes.

Mark Wallace CFP® AIF® CRPC®

Financial Planner

Skyline Advisors

*Note, this blog post was updated January 6, 2023 to reflect recent changes and to delineate the differences between RMDs and the 10 year depletion rule.

The information above should not be taken as tax advice.  You should contact your tax advisor or financial planner for personalized tax advice that applies to your facts and circumstances.  Note, rules and notices regarding tax law are subject to change and this blog was written under current tax law.  The Secure Act applies to accounts inherited after January 1, 2020.  It does not apply to accounts inherited before then, or to all beneficiaries, nor does it affect living account holders except to increase the RMD age to 72.