Limited RMD Relief
October 03, 2024
Once upon a time, distributions from an inherited IRA could be spread over the beneficiary’s lifetime. For young beneficiaries, the RMDs might be small enough that the inherited IRA would continue to grow handsomely. This changed with passage of the SECURE Act. In general, subject to important exceptions, the assets of an inherited IRA must be distributed to the beneficiary over ten years.
Estate planners debated how to handle those distributions. Should they be deferred until the tenth year, for maximum tax-deferred buildup? Or should a program of taking 10% each year for ten years be better, as it avoids pushing the beneficiary into a higher tax bracket?
When the IRS proposed regulations to implement the new rules, the Service pointed out that most everyone had overlooked another rule. If the account owner was already taking required minimum distributions (RMDs), the beneficiary also had to take distributions at least that fast. Failure to take an RMD in that situation results in a substantial excise tax.
The proposal caught planners by surprise, and the IRS responded by waiving penalties for failure to take an RMD from certain inherited IRAs in 2021, 2022, and 2023. In IRS Notice 2024-35, the penalties are again waived for 2024. The Notice suggests that the Regulation is now expected to take effect in 2025.
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