In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act announced a new regulation that ended what was commonly referred to as a Stretch IRA. A Stretch IRA was not actually an IRA but an estate planning tool that allowed the financial transfer of an IRA to a non-spouse beneficiary that could have had beneficial financial and tax benefits for multiple generations. Simply put, IRA beneficiaries could take a required minimum distribution (RMD) based on their age and life expectancies. The younger you were, the smaller the RMD. Meanwhile, the IRA continued to grow tax-deferred. (1) 

With the passage of the Secure Act, the new rule stated that Inherited IRAs acquired after January 1, 2020, must be emptied within ten years by non-eligible designated beneficiaries (Ex: non-minor children, grandchildren, and some look-through trusts). But due to confusing language, many beneficiaries believed they didn’t have to take an annual RMD and could wait until year ten, for example, to take one lump distribution to empty the IRA. Unfortunately, that was not the case for some beneficiaries who mistakenly did not take their RMDs in 2021 and 2022. The proposed regulations clarified that no annual RMD was needed by the non-eligible designated beneficiaries if the original owner of the retirement account passed away before their required beginning date (RBD) of having to begin taking annual RMDs.

On the contrary, non-eligible designated beneficiaries who inherit an IRA from someone who passed away after their RBD and after 2019 must take annual RMDs based on their life expectancy and have the funds completely withdrawn within ten years. (This doesn’t apply to Roth IRAs). 

As most people who are 72 ½ years old know, any missed RMD not fully taken is subject to a 50% excise tax. However, the IRS is known to disregard this penalty if the RMD is not taken due to an acceptable error. The good news is that the IRS has decided to waive the 50% excise tax for those who didn’t take an RMD and should have in 2021 and 2022 for an inherited IRA.

If you have any questions regarding an Inherited IRA and the clarified rules surrounding RMDs you may have to take, please get in touch with our office at (248) 828-8000 or by clicking HERE. My advisors and CPAs are ready and willing to help.

 

  1. https://www.morningstar.com/articles/962268/new-retirement-law-throws-ira-heirs-a-curveball