Inherited Retirement Account Owners Granted Distribution Relief Through Latest IRS Postponement

The Internal Revenue Service (IRS) again postponed Required Minimum Distribution (RMD) rules for certain taxpayers owning inherited retirement accounts.The announcement delays mandatory distributions for these taxpayers that were previously expected to begin in 2024 and continue until 2025.

Prior to 2020, beneficiaries of inherited retirement accounts were generally able to withdraw the balance of these accounts over their lifetime.With the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, many non-spouse beneficiaries who inherited retirement accounts in 2020 or later are now forced to withdraw the account balance over a span of ten years while taking minimum distributions annually.

These new RMD rules, originally set to begin with calendar year 2020, have since been postponed by the IRS largely to allow for review and response to widespread comments that criticized unnecessary complexities taxpayers now face surrounding RMDs.Formerly, Notice 2023-54 was the latest guidance which provided that these new RMD rules would apply starting with the 2024 year.During 2024, affected taxpayers would have otherwise been required to begin distributing part of their inherited retirement accounts.Through Notice 2024-35, released earlier this month, the IRS announced that final regulations not yet issued regarding these RMD rules are now expected to apply to calendar years beginning on or after January 1, 2025.

For example, let’s say a 55-year-old taxpayer inherited an IRA in 2021 from a 75-year-old parent. Since inheriting the IRA, the taxpayer has taken no distributions as none have been required due to IRS relief.The account must still be depleted by the end of the tenth year – December 31, 2031.The first year that the taxpayer is required to take a distribution from the account is 2025 and assuming no distributions are taken in 2024, the taxpayer only has 7 years to deplete the account fully.

Despite the relief granted by the IRS, there may be cases where taking a 2024 distribution from an inherited retirement account would make sense for certain taxpayers. The 10-year rule still mandates that the account be fully withdrawn by the end of the tenth year, and delaying distributions could prove to be problematic by creating a slight bottleneck as the tenth year approaches. Should tax rates increase or the taxpayer expects more income in future years compared to 2024, a distribution in 2024 will need to be considered. Taxpayers with inherited retirement accounts shouldunderstand their RMD obligations heading into 2025. Failure to take the correct amount of distributions would not only result in a 25% excise tax but may also bring unexpected income tax consequences. Although the IRS has been generous with RMD relief thus far, time may be running out for some to implement distribution strategies surrounding their RMDs.

Authors: Anthony Pagano, CPA | [email protected] and Maryann Reyes, CPA, Principal | [email protected]