IRS waives penalties for some who inherited IRAs
A few readers wrote asking for clarification of last week's column featuring IRA expert Robert Keebler, CPA/PFS. Keebler is a partner with Keebler & Associates LLP (tinyurl.com/ykwbk68u). The topic had to do with inherited IRAs in a limited situation where the IRA owner is the father and the son is the sole beneficiary. The example brought up the new 10-year rule adopted by the SECURE Act, which became effective in 2020.
As explained last week, if the owner of the IRA dies before the owner's required beginning date (RBD) (age 72 after the SECURE Act), there is no annual required minimum distribution (RMD) for the beneficiary.
That is, no annual RMDs are required for this type of owner/beneficiary situation. However, the account must be distributed by the 10th calendar year after the death of the IRA owner. That change, adopted by the SECURE Act, is effective for deaths that occurred after 2019.
The more complicated issue involves the death of an older owner (who in our example died at age 80) of a traditional, tax-deferred IRA. The 80-year-old was taking owner RMDs after reaching his RBD.
By definition, the son is a designated beneficiary and not an “eligible” designated beneficiary — more on that shortly.
Because the SECURE Act itself did not specify whether the beneficiary needed to take yearly beneficiary RMDs over the new 10-year period, experts concluded (and so did the IRS in a revision to Publication 590-B for tax year 2020) that no beneficiary
RMDs were due.
After the SECURE Act was passed, the IRS started working on regulations. Proposed regulations were released in February 2022 (tinyurl.com/3j6vb45t).
Those proposed regs caused some problems. The IRS took the position that beneficiary RMDs were in fact due during the 10-year period, and the beneficiary had to empty the account by the 10th calendar year after the death of the IRA owner.
This apparent change surprised some IRA inheritors who thought they did not need to take beneficiary RMDs each year. And, it led to many people filing comment letters with the IRS asking for a waiver of penalties if the beneficiary RMD annual withdrawals were now indeed required. (See comments on Regulations.gov at tinyurl.com/3xnaexxh).
Then, last Friday, Oct. 7, the IRS came to the rescue when it released Notice 2022-53 (tinyurl.com/5y924pne) to provide waivers of the penalty. What's important to know is that the waiver does not apply to every IRA beneficiary.
Let's go back to last week. If the son of the 80-year-old owner who died in 2020 did not take a beneficiary RMD in 2021, the IRS will waive the excise tax that would be due. How do we know that? Notice 2022-53.
But not all people who inherited traditional IRAs in 2020 (or 2021) qualify for the waiver. Who is excluded?
According to an IRS spokesperson, “The guidance in this notice does not permit an eligible designated beneficiary who is taking annual RMDs for life (or until age 31 in the case of an eligible designated beneficiary who is a minor child) to skip those RMDs for 2021 or 2022.”
An eligible designated beneficiary is “the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner,” quoting IRS Publication 590-B (tinyurl.com/yc6tx8dh) for tax year 2021.
What if a taxpayer has already paid a penalty for a “missed” RMD in 2021? Notice 2022-53 said the taxpayer “may request a refund of that excise tax.”
The IRS spokesperson also confirmed that if an IRA owner died in 2020 or 2021, then a year-of-death owner's RMD, if not already taken by the owner of the IRA, must be taken by the beneficiary. He added that Notice 2022-53 does not “provide any waiver of the excise tax with respect to an IRA owner's RMD that is required to be taken by the beneficiary for the year of the IRA owner's death.”
As always, let me pass along this warning: Be guided by your tax adviser when you inherit an IRA or 401(k). The rules are evolving; your adviser has to be an expert in the field, and he or she needs to know your unique tax situation.
On another subject, time is running out to apply for this year's 401(k) Champion Award, which I sponsor. The award shines a light on 401(k) participants who can inspire others to save for retirement. The deadline is Oct. 20. Go to 401kchampion.com for more information.
Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.