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RMD - required minimum distribution

Retirement Planning > Spending in Retirement > Required Minimum Distributions

IRS’ New RMD Guidance Brings Relief to IRA Beneficiaries — for Now

By John Manganaro

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What You Need to Know

  • Under IRS guidance issued earlier this year under the Secure Act, most IRA beneficiaries must take annual RMDs, emptying the account in 10 years.
  • The IRS last week waived penalties for missed RMDs for 2021 and 2022 under the 10-year rule.
  • The new IRS guidance gives advisors and clients more room for planning, advisors and CPAs say.

At the end of last week, the Internal Revenue Service published Notice 2022-53, in which the agency clarified that it soon intends to publish a final regulation pertaining to the distribution of tax-sheltered assets held in inherited individual retirement accounts.

The notice also informed financial planners and their clients that they do not need to take distributions from such inherited accounts for 2021 or 2022 — essentially giving them a free pass for required minimum distributions while the final regulations are being worked out, with those regulations applying “no earlier than the 2023 distribution calendar year.”

Notice 2022-53 immediately grabbed the attention of the financial advisory industry, with many financial planners and clients breathing a guarded sigh of relief about the IRS’ guidance. Prior to the publication of the notice, there was substantial confusion about when and whether certain benefices would have to begin drawing down inherited IRA assets.

The Secure Act and the Death of the Stretch IRA  

The inherited IRA RMD issue ties back to a key legislative change made by the Setting Every Community Up for Retirement Enhancement (Secure) Act. That law, passed late in 2019, did away with the so-called “stretch IRA” in that it established a mandatory 10-year window for the distribution of inherited IRA funds applying to most beneficiaries other than spouses.

Before the Secure Act, any heirs who inherited traditional IRAs could stretch the account’s tax-deferring power by basing the calculation of the RMD amounts on their own life expectancy. They could then enjoy decades of tax-free asset appreciation that often would see the inherited account’s value grow substantially rater than shrink, thanks to the modest RMD payments.

Under proposed IRS regulations issued earlier this year, such IRA beneficiaries must instead fully draw down the account over a 10-year period, and they must take required minimum distributions in years one through nine if the account owner died after their own required beginning date.

Though they are clear in their inherited IRA RMD requirements, the proposed rules have yet to be technically finalized, and they could in fact be subject to meaningful change. As such, advisory industry practitioners have been unsure whether their clients with inherited IRAs must make such distributions this year or next year.

With Notice 2022-53, the answer has been given, and advisors can now instruct their clients to wait and see what the final regulations entail before drawing any unwanted or unneeded funds from inherited IRAs.

Insights for Advisors and Clients

Asked for his initial response to these developments, Tim Steffen, a certified public accountant and director of tax planning at Baird, says the IRS has now helpfully signaled that it plans to finalize these points soon — but not necessarily this year. Steffen also points out that, while helpful, these updates do not eliminate all the inherited RMD uncertainty.

“These proposed rules might be the final rules, or they might not — but there is now another year to plan,” he says. “The bottom line is that there is no need to take inherited IRA RMDs for this year if you were following the 10-year rule [and intending to back-load withdrawals]. There is no risk of facing a penalty for missing those RMDs this year.”

Debra Taylor, a CPA and the founder and lead wealth advisor at Taylor Financial, agrees with Steffen that caution is still warranted.

“As we all know, anything can happen when it comes to tax regulations,” Taylor says. “Having said that, I am feeling reasonably confident, given Notice 2022-53, that we have some idea about what is required of us regarding RMDs and emptying the inherited IRA account by year 10.”

Taylor says the new notice gives practitioners like herself meaningful time to prepare for 2023 and beyond, when RMDs will be part of the post-mortem planning for clients and their beneficiaries.

“The notice also highlights, once again, the benefits of a Roth IRA and IRA distribution planning for our clients,” she adds. “Coupled with legislation making its way through the House and Senate, it also reinforces that the IRS and Congress are staying neutral or leaning into Roth IRAs — and the up-front revenue they are generating.”

Justin Miller, a CPA and the national director of wealth planning at Evercore Wealth Management, says taxpayers can breathe a little sigh of relief thanks to the notice. While it does not definitively answer the question about whether a beneficiary of an inherited IRA is supposed to immediately take required minimum distributions after an IRA owner’s death, the notice does quell the fear of taxpayers being subject to substantial 50% penalties for not taking such distributions prior to 2023, he says.

By providing an effective date no earlier than 2023, the government has accomplished two key goals, Miller adds. First, taxpayers will not be subject the usual penalty for failure to withdraw an RMD from an inherited IRA if the proposed regulations eventually are finalized in their current form.

Second, he notes, the IRS and Treasury have given themselves more time to make a final decision about whether to even include the proposed immediate drawdown rule for required minimum distributions for inherited IRAs in the final regulations.

“For the sake of tax simplification, the professional community is still hopeful that the IRS and Treasury might change their minds about the proposed new rule before they issue final regulations,” Miller says.

From a financial planning perspective, regardless of whether, when and how taxpayers are eventually required to take RMDs from an inherited IRA, they still might want to spread out their withdrawals over the 10-year period to avoid being in a higher tax bracket in any given year.

RMDs in 2022 Might Still Be Warranted

In initial comments about IRS Notice 2022-53 posted to Twitter, Jeffrey Levine, CPA and chief planning officer at Buckingham Wealth Partners, says the IRS has now given a definitive answer to one of the most frequently asked questions of 2022.

“Notice 2022-53 says beneficiaries subject to the 10-Year rule don’t have to worry about taking any RMDs from the inherited accounts in 2021 or 2022,” Levine writes. “Unfortunately, the Notice doesn’t definitively answer the question for future years.”

Rather, Levine emphasizes, the IRS has simply confirmed that planners and clients don’t have to worry about distributions during the 10-year rule until — at the earliest — 2023.

“So, the IRS still might impose [2023 RMDs] down the road, or they might not,” Levine warns.

Alternatively, Levine says, Congress could make this entire discussion a moot point by clarifying their intent via legislation, perhaps as part of the much-anticipated Secure Act 2.0 package.

Levine further notes that, just because a beneficiary is not legally required to take a distribution this year, that doesn’t always mean they shouldn’t in fact take a distribution.

“In fact, many such individuals will benefit from taking voluntary distributions in 2022 to try and avoid a larger or larger future distribution being taxed at a higher rate,” Levine writes. “Remember, an important tax planning ‘rule’ is to try to pay taxes at the lowest possible rate.”

As Levine points out, this sometimes entails paying taxes sooner than necessary — at lower rates — to avoid having to pay them down the road at potentially higher rates.

“Ultimately, though, those 2022 distributions will be a choice,” Levine says.

John Manganaro

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