The Tax Blotter is a summary of the latest tax laws and decisions.
Under recent tax legislation, individuals who inherit IRAs must take annual minimum distributions (RMDs) for ten years.
Make exceptions to the rules. Starting in 2020, new rules apply to those who inherit an IRA. Generally, the beneficiary must empty the account within ten years, effectively eliminating new “stretch IRAs” that could last for generations. However, there are important exceptions for “Eligible Designated Beneficiaries” (EDBs), such as surviving spouses, minor children (until they reach the age of majority), the chronically ill or disabled, and beneficiaries who are no more than ten years younger than the deceased.
Hurry up or wait. When the tax law change went into effect, it caused a great deal of confusion among taxpayers and tax professionals alike. It was not clear whether someone who inherited an IRA after the participant began taking RMDs would have to continue taking RMDs each year over the ten-year period. The IRS just issued final regulations clarifying that RMDs must be taken each year. However, if the participant had not yet begun taking RMDs, the beneficiary can wait until the tenth year to withdraw all of the money.
No turning back. During the pandemic, the IRS waived the penalty for failing to take RMDs. This ended up covering tax years 2021 through 2024. So do people who inherited IRAs now have to go back and take RMDs for those years? Fortunately, the IRS says “no.” Under the new final rules, you count the ten-year period as usual, but you don’t have to make up the missed years. For example, if the decedent died in 2021, a beneficiary must start taking RMDs in 2025 and wrap things up by 2031.
