RMDs now required for death beneficiaries

If you inherited an IRA after January 1, 2020, you might be in for a surprise. Under proposed rules issued in February 2022, you might have to start withdrawing that money now.

The shift comes as a shock for many. When the Secure Act passed in 2019, it required most death beneficiaries to fully withdraw retirement plan assets within a 10-year window. The expected interpretation was that someone could let that money grow for nine years and then withdraw the total sum in year 10.

But it seems the IRS has interpreted that differently. Its proposed regulations create required minimum distributions (RMDs). That means if you inherited your mother’s IRA in 2020, you need to start taking RMDs now, increasing your income and your tax bill.

Exceptions to the RMD rule include a surviving spouse, minor child, or a chronically ill or disabled beneficiary.

Some background. Before the Secure Act, beneficiaries who inherited an IRA could keep it for their lifetime. They had to take RMDs as set by the IRS, but depending on their age, those withdrawals could stretch for decades. It was known as a “stretch IRA.”

That stretch strategy was great for the owner who could let the assets grow and grow. But distributions from non-Roth retirement plans (even inherited ones) are taxed as ordinary income. So, stretching an IRA deprived the government of tax revenue.

With the Secure Act, Congress set a 10-year time limit on distributions, allowing taxes to be collected sooner.

What to do now. For a non-spousal beneficiary who inherited an IRA in 2020, under the proposed rules, if you didn’t take a distribution in 2021, you should double up in 2022 and file a Form 5329 to waive the penalty.

Alternately, you can wait and see if the final regulation provides any kind of safe harbor or blanket reprieve for those who didn’t take their RMDs, because the initial IRS regulations said they didn’t have to.

Some critics say the IRS interpretation is inaccurate and goes against the Secure Act’s intent, suggesting a possibility the regulations will be reversed.

But no matter how that decision goes, it’s a good idea to strategize a plan of action.