By Tom Ochsenschlager, J.D., CPA
The IRS’ recently issued proposed regulations REG-105954-20 would accelerate the required distributions from an inherited IRA.
Generally, before the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), an individual who inherited an IRA could extend the IRA distributions over their lifetime with each distribution based on their life expectancy. Accordingly, this would delay the taxation of the IRA, often referred to as the “stretch rule.” After the SECURE Act, the stretch rule (with certain exceptions described below) only applies to IRAs inherited prior to 2020. For IRAs acquired after 2019, the SECURE Act generally requires that the entire value of an inherited IRA be distributed within 10 years, although the individual inheriting the IRA has the right to choose how much is distributed (taxed) in each of those years (or so we thought).
However, the proposed regulations would impose an even more restrictive rule where an individual inherits a “regular” IRA from a decedent who passed away after Dec. 31, 2019, and who had reached their required beginning date (RBD) before passing away. In that circumstance, the proposed regulation would require the inheritor of the IRA to begin taking annual distributions in each of the first nine years after the death of the decedent and distribute the remainder in year 10. In effect, the proposed regulations would reduce the ability to defer income tax for those who inherit an IRA from a decedent who was 72 or older at the date of death. (The SECURE Act increased the age for required RMDs from 70-1/2 to 72 after 2019.) However, this more restrictive rule would not apply for eligible beneficiaries described as those with disabilities, beneficiaries not more than 10 years younger than the decedent, the decedent’s spouse, or a minor child of the decedent.
Regarding inherited Roth IRAs, there is no requirement that distributions be made during the first nine years, but the entire amount must be distributed by Dec. 31 of the 10th year following the account owner’s date of death.
It is important to note that a failure to make the required distributions can result in a 50% penalty on the amount that should have been withdrawn.
Hopefully, the IRS will provide some relief for taxpayers who failed in 2021 to make the payments required under the proposed regulations that were released February 2022.
Hopefully, the IRS, in its final regulations, will provide some relief measures.