Irs Guidance on Inherited IRAs After Notice 2023-54

Notice 2023-54 has clarified the rules for inherited IRAs, providing much-needed guidance for beneficiaries and financial institutions.

The IRS has established a five-year period for beneficiaries to distribute inherited IRA assets, regardless of the account owner's age at death.

This new guidance applies to all inherited IRAs, including those inherited from a spouse, parent, or non-spouse individual.

Beneficiaries must take required minimum distributions (RMDs) from the inherited IRA within the five-year period, starting from the date of the account owner's death.

To qualify for special treatment, beneficiaries must meet certain eligibility requirements. Eligible beneficiaries are exempt from the 10-year RMD Rule, including surviving spouses and children under 21 of the IRA owner.

Eligible beneficiaries can choose to take RMDs consistent with their life expectancy or elect the 10-year rule. If the original account holder had not begun taking RMDs, eligible beneficiaries can choose how to proceed. If the original account holder was taking them before death, eligible beneficiaries can elect to take them consistent with the longer of their life expectancy or that of the participant.

Eligible beneficiaries younger than 21 have a special treatment. The 10-year rule does not apply until they turn 21.

To qualify as an Eligible Designated Beneficiary (EDB), individuals must meet certain criteria. EDBs include the owner's surviving spouse, child who is less than 18 years of age, disabled individual, chronically ill individual, and any other individual who is not more than 10 years younger than the deceased IRA owner.

EDBs can withdraw their money over their own life expectancy, similar to the old Stretch IRA. There are two exceptions, though. The first is for the surviving spouse, who can roll the inherited IRA into their own or continue the first spouse's RMDs. The second exception is for minor children, who are subject to the 10-year rule once they turn 18.

Here is a summary of the eligibility requirements for EDBs:

The tax implications of inheriting an IRA can be complex, but it's essential to understand the rules to make informed decisions.

Tax rates will remain low for 2024 and 2025, but will go back up in 2026 to the higher rates in effect before 2018.

Delaying distribution from an inherited traditional IRA will likely mean a larger tax bill at the end of the 10-year payout period, due to higher inherited traditional balances.

A larger tax bill can be avoided by taking RMDs in 2024 and 2025.

Inherited IRA beneficiaries will face a larger tax bill if they delay distribution, as the tax rates will be higher by the end of the 10-year payout period.

To manage and mitigate tax burdens, strategies should be considered.

The timing of distributions under the 10-year rule can significantly impact the beneficiary's tax situation.

As of 2025, the new regulations on inherited IRAs will significantly impact estate planning and financial advising.

Financial advisors should consider reviewing eligible accounts for conversion to a ROTH IRA, as ROTH IRAs do not require withdrawals until after the death of the owner and in most cases, withdrawals will be tax-free.

The five-year taxable distributions and 10-year inherited ROTH IRA rules for beneficiaries must be taken into account when considering this option.

Beneficiary designations on IRAs should be reviewed to ensure alignment with the new rules and the account holder's estate planning goals.

Trust structures can be used as beneficiaries to provide control over distributions while optimizing tax benefits.

The timing of distributions under the 10-year rule can significantly impact the beneficiary's tax situation, and strategies to manage and mitigate tax burdens should be a key consideration.

Here are some key points to keep in mind when evaluating inherited IRA options:

In 2024 and 2025, individual federal tax rates are low, making it a good time for beneficiaries to take Required Minimum Distributions (RMDs) from inherited traditional IRAs.

Delaying distribution will likely result in a larger tax bill at the end of the required 10-year payout period due to higher inherited traditional balances.

The final regulations on inherited IRAs confirm that distributions to a beneficiary must be made "at least as rapidly" as while the beneficiary is living. This means that if the original IRA owner was taking RMDs under the life expectancy rules, what's left in the account has to be distributed to the beneficiaries at the same rate or faster.

The 10-year rule applies to most beneficiaries, requiring them to fully distribute inherited IRAs within 10 years of the original owner's death. This rule replaces the previous "Stretch IRA" strategy, which allowed beneficiaries to take distributions over their lifetime.

Certain individuals, such as surviving spouses, disabled persons, and those not more than 10 years younger than the account holder, are exempt from the 10-year rule and can take distributions over their lifetime. Ineligible beneficiaries, like adult children, must follow the 10-year rule.

Here are the key groups of inherited IRAs and their distribution rules:

The final regulations will take effect for calendar years starting after January 1, 2025, allowing beneficiaries more time to adjust to the new rules and seek professional advice if needed.

Do RMDs apply to inherited IRAs? Yes, they do, but the rules depend on the beneficiary's relationship to the original depositor.

If you're a spouse, non-spouse, or an entity like a trust, estate, or charity, you'll need to follow specific RMD rules.

If you don't take the RMDs from your inherited account, you'll face a penalty equal to 25% of the amount that should have been withdrawn.

RMD rules for inherited Roth IRAs are slightly different because the original owner wasn't required to take an RMD from their account.

As long as the assets have been in the original Roth IRA owner's account for 5 years or more, withdrawals are generally tax-free.

The final regulations on inherited IRAs have been released, and they're a game-changer for beneficiaries. The 10-year rule is now in effect, requiring most beneficiaries to fully distribute inherited IRAs within 10 years of the original owner's death.

This rule replaces the previous "Stretch IRA" strategy, which allowed beneficiaries to take distributions over their lifetime. The 10-year rule applies to most beneficiaries, but there are some exceptions.

Certain individuals, such as surviving spouses, disabled persons, and those not more than 10 years younger than the account holder, are exempt from the 10-year rule and can take distributions over their lifetime. These individuals don't have to worry about the 10-year deadline.

The IRS has provided transitional relief for missed RMDs for the years 2023 and 2024, waiving penalties for beneficiaries who failed to take required distributions during this period. The SECURE 2.0 ACT reduced the penalty to a 25% excise tax, which can possibly be reduced further to 10% if the RMD is corrected within two years.

Here's a breakdown of the eligible beneficiaries who are exempt from the 10-year rule:

The final regulations will take effect for calendar years starting after January 1, 2025, giving beneficiaries more time to adjust to the new rules and seek professional advice if needed.