Inherited IRAs Get Yet Another Reprieve from Taxation

MichaelAngell_CFFP
MichaelAngell_CFFP FP FPQP, FP 512, FP 514, CFFP Faculty & Instructors Posts: 4

Vested

🗣️
in Financial Planners Professional Community

In July of 2023, the IRS released Notice 2023-54 which deals with RMDs for Inherited IRAs.  To give some background, the SECURE Act of 2019 changed the rules regarding Inherited IRAs.  Prior to the SECURE Act, Inherited IRAs generally had to be liquidated within 5 years of the date of death IF the proceeds went to non-spouse beneficiaries.  Spousal beneficiaries on the other hand had, and continue to have, the privilege of rolling the entire IRA balance into their own IRA.  To extrapolate, eligible designated beneficiaries (EBDs) include the following:

  • Surviving Spouse
  • Minor child less than 18 years of age
  • A disabled individual
  • A chronically ill individual
  • Any other individual who is not more than ten years younger than the deceased account owner

A non-EBD is a non-spouse individual or entity who does not meet one of the requirements to be an EBD. Non-EBDs include certain trusts, charities and most notably adult children of the deceased.

The SECURE Act extended the liquidation timeline for non-spouse beneficiaries from 5 to 10 years and financial advisors everywhere cheered.  The cheering must have been too loud, however, because someone is now trying to change all that.  There is a persistent attempt in Washington to superimpose a new, additional RMD requirement on Inherited IRAs, a.k.a Beneficiary IRAs or bene-IRAs.  This will result in a tacit tax increase that was never part of the original SECURE legislation. If it had been, the IRS would have already issued the requisite RMD table long ago, which they have yet to do. Candidly, if the proposal had majority support in Congress it would already be law by now.  

Editorializing aside, Notice 2023-54 provides one more year of relief for “Non-Eligible Designated Beneficiaries” who inherited retirement accounts from an owner who died on or after their Required Beginning Date by eliminating any penalties for failing to take RMDs for 2023.  In addition, Notice 2023-54 also offers a temporary RMD reprieve to retirement account owners born in 1951, who, as a result of the "SECURE 2.0" law are now no longer required to take RMDs until they turn 73 (i.e., in 2024).

In short, the notice provides at least one more year of relief to taxpayers.  The reality is, clients can continue to let their bene-IRAs grow tax deferred and sleep a little more easily for now.

Categories