Inherited IRA

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Inherited IRAs – An Update on Required Minimum Distributions

In the past, inheriting an IRA from a parent allowed for stretching withdrawals over one’s life expectancy (commonly known as a “stretch IRA”). However, rules for beneficiaries of retirement accounts have become more complex in recent years thanks to Congress passing the SECURE Act (at the end of 2019) and the SECURE Act 2.0 (in 2022).

Here is a timeline of events so you can better understand the prior rules, current rules, and potential future rules:

Before 2020 (Pre SECURE Act): All beneficiaries could stretch IRA withdrawals over their lifetime using required minimum distributions (“RMDs”). Beneficiaries would calculate their life expectancy according to their current age in the IRS uniform lifetime table. The younger you are the smaller your RMD. Hence, a child inheriting from their parent could “stretch” out the timeframe for making these taxable IRA distributions, thereby allowing the accounts to benefit from greater tax-deferred growth.

January 2020 (SECURE Act): The original SECURE Act eliminated the so-called “stretch IRA” for anyone who inherited a traditional IRA on or after January 1, 2020. The SECURE Act also created two beneficiary categories. Non-eligible designated beneficiaries (the more common category) were initially believed to have to empty the account within 10 years after the account owner’s death but without needing to take RMDs on an annual basis. Non-eligible designated beneficiaries are, most commonly, the adult children of the original account owner. Eligible designated beneficiaries (EDBs) are allowed to continue stretching their inherited IRA RMDs. EDBs include the original account owner’s spouse, minor children, anyone disabled or chronically ill (as defined by the IRS), and anyone not more than 10 years younger than the original IRA owner.

February 2022: In early 2022, the IRS proposed regulations that would require distributions for the non-eligible designated beneficiaries over years one through nine and an emptying of the account in year ten, but only if the original account owner was subject to RMDs at the time of their death. In other words, the IRS’ proposal clarified that non-eligible designated beneficiaries could not simply wait until the end of year ten to empty out an inherited IRA if the original account owner had already been taking their own RMDs. This became known as the “at least as rapidly” rule. If the original account owner died prior to commencement of their own RMDs, then the non-eligible designated beneficiary need not adhere to taking any RMDs in years one through nine, but they would still be required to empty the account by year ten.

October 2022: Given the change in expectation and the massive number of beneficiaries who had opted not to take any RMDs thus far thinking they could just wait until year ten, the IRS waived penalties for beneficiaries who missed RMDs in both 2021 and 2022. The IRS announced forthcoming final regulations, expected in 2023.

July 2023: Most recently, the IRS extended the waiver for missed RMD penalties to 2023, meaning that anyone who has inherited an IRA from someone who died in 2020 (or later) does not have to take an RMD this year. The IRS has stated it expects to release final guidance in 2024 as to who must take RMDs on inherited IRAs and when to take them.

To summarize, the original SECURE Act eliminated the so-called stretch IRA rule for inherited traditional IRAs while simultaneously creating two categories of beneficiaries subject to different RMD rules. The SECURE Act imposed a 10-year rule for most IRA beneficiaries for accounts inherited when the original owner passed away on or after January 1, 2020. However, in early 2022 the IRS introduced proposed regulations that created widespread confusion about who needed to take annual distributions and how to calculate those distributions. While the IRS has not finalized any regulations as of this writing, they have granted relief from taking any RMDs for inherited IRAs in 2021, 2022, and, most recently, 2023.


New (and Pending) Inherited IRA Distribution Rules for Anyone Who Died in 2020 or Later

Original IRA Owner Died Prior to Starting RMDs Original IRA Owner Died While Taking RMDs
Eligible Designated Beneficiary (e.g., spouse or minor child of the decedent, anyone not more than 10 years younger, anyone disabled or chronically ill) Take distributions over the longer of their own life expectancy and the original owner’s remaining life expectancy (i.e., stretch IRA)
Non-Eligible Designated Beneficiary (e.g., adult child or anyone else that does not qualify as an Eligible Designated Beneficiary) 10 years to empty the account; no annual RMDs 10 years to empty the account; must take annual RMDs (pending final ruling)
Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

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