2023 Inherited IRA RMD Waiver and Your Options

The 2023 inherited IRA RMD waiver is a game-changer for beneficiaries of inherited IRAs.

The SECURE Act of 2019 changed the rules for inherited IRAs, requiring most beneficiaries to take RMDs by December 31 of the year after the original account owner's death.

This means that some beneficiaries may be required to take RMDs, even if the original account owner was under 72 years old.

The good news is that some beneficiaries may be eligible for the waiver, which would allow them to avoid taking RMDs in 2023.

The rules governing RMDs are complex, but knowing the key terms can help you navigate them. For example, an eligible designated beneficiary is someone who is the account owner's surviving spouse or minor child, a disabled or chronically ill individual, or any other person who's not more than 10 years younger than the original account owner.

The five-year rule states that the account must be depleted on December 31 in the year containing the fifth anniversary of the account owner's death. This rule applies to inherited IRAs, but there's also a 10-year rule, which requires the account to be depleted on December 31 in the year containing the 10th anniversary of the account owner's death.

The SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only eligible designated beneficiaries may stretch payments over their life expectancies. The following heirs are eligible designated beneficiaries:

Non-eligible designated beneficiaries, on the other hand, must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the RBD for RMDs.

The rules for IRAs can be complex, especially when it comes to inherited IRAs. The SECURE Act imposed limitations on which heirs can stretch IRAs, only allowing "eligible designated beneficiaries" to do so.

Eligible designated beneficiaries include surviving spouses, children younger than the "age of majority", individuals with disabilities, chronically ill individuals, and individuals who are no more than 10 years younger than the account owner.

Non-eligible designated beneficiaries, on the other hand, must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the RBD for RMDs.

The IRS issued proposed regulations in February 2022 that added to the confusion, requiring beneficiaries of IRAs where the account owner had attained their RBD to take their taxable RMDs in years one through nine after death, based on their life expectancies.

The IRS has waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD, or missed 2022 RMDs if the participant died in 2021 on or after the RBD.

Here's a breakdown of the rules for non-eligible designated beneficiaries:

The IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD.

The IRS has provided relief to taxpayers subject to the 10-year rule for inherited IRAs. The waiver applies to RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD.

To be eligible for this waiver, beneficiaries must meet certain requirements. The IRS has waived enforcement against taxpayers who missed RMDs in 2021 and 2022 if the plan participant died in 2020 on or after the RBD, or who missed 2022 RMDs if the participant died in 2021 on or after the RBD.

This waiver relief is a welcome respite for beneficiaries who may have been facing penalties for missed RMDs. However, it's essential to note that this relief is only applicable to certain heirs, known as "non-eligible designated beneficiaries", subject to the 10-year withdrawal rule under the Secure Act.

If the account owner died on or after the Required Beginning Date (RBD), RMDs start the year following the account owner's death.

The spouse can then take life expectancy payments based on their own age, without facing a 10% penalty at any time.

If the account owner died before the RBD, the spouse may be able to delay RMDs until the RBD.

Early withdrawals from the inherited IRA are subject to a 10% penalty, unless the spouse takes life expectancy payments.

Normal RMD rules apply based on the spouse's age, which means they'll need to take their required minimum distributions by a certain age.

The IRS has again extended relief to taxpayers subject to the 10-year rule for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. This is the third consecutive year the IRS has offered this relief.

The 10-year rule was introduced by the Secure Act, which changed the way RMDs are calculated for certain heirs. Under this rule, non-eligible designated beneficiaries must empty inherited accounts by the 10th year after the original account owner's death, or face a hefty penalty.

The IRS has delayed penalties for missed RMDs, but only for certain heirs, known as "non-eligible designated beneficiaries." These beneficiaries include heirs who aren't a spouse, minor child, disabled, chronically ill, or certain trusts.

The latest waiver relief only applies to RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won't be assessed a penalty on missed RMDs.

Here are the years and corresponding waiver relief:

The CARES Act made a significant change to RMD rules, waiving all RMD requirements for 2020. This means you can skip over that year if you had already elected to withdraw inherited funds under the five-year rule.

If you had inherited funds and were required to withdraw them by a certain deadline, the CARES Act allowed you to push that deadline back by one year. For example, if the original deadline was December 31, 2024, it's now December 31, 2025.

The CARES Act only waived RMDs for 2020, so RMDs are mandatory in all subsequent tax years.