485 Madison Avenue,
9th Floor
New York, NY 10022
Ph: (212) 792-6300
Fax: (212) 792-6350
100 Quentin Roosevelt
Blvd, Suite 516
Garden City, NY 11530
Ph: (516) 542-6300
Fax: (516) 542-9021


IRS Extends Relief for Inherited IRAs

The IRS announced it will offer relief to taxpayers who may not have taken required minimum distributions for inherited IRA plans. IRS Notice 2023-54, which provides transitional relief related to recent legislative changes to required minimum distributions, also extends relief granted to taxpayers covered by the “10-year rule” for inherited IRAs and other defined contribution plans by forgiving missed required minimum distributions (RMDs) penalties if the participant passed away in 2020, 2021 or 2022 on or after the required beginning date (RBD).

10-Year Rule Background & SECURE Act

Prior to the enactment of the original SECURE Act, beneficiaries of inherited IRAs could “stretch” the RMDs on the accounts over their entire life expectancies. The stretch period could run for decades for younger heirs, allowing them to take smaller distributions and defer taxes while the accounts grew. These heirs then had the option to pass their IRAs to later generations, potentially deferring tax payments even longer.

The SECURE Act eliminated the rules permitting stretch RMDs for most heirs, referred to as designated beneficiaries For IRA owners or defined contribution plan participants who died in 2020 or later, the law generally requires that the entire balance of the account be distributed within 10 years of death. The rule applies regardless of whether the deceased dies before, on or after the RBD for RMDs from the plan.

Certain eligible designated beneficiaries, or EDBs, may continue to stretch payments over their life expectancies or, if the deceased died before the RBD, may elect the 10-year rule treatment.

2022 Update

According to proposed IRS regulations released in February 2022, designated beneficiaries who inherit an IRA or defined contribution plan before the deceased’s RBD can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includes the 10-year anniversary of the death.

Notably, though, if the deceased dies on or after the RBD, designated beneficiaries would be required to take taxable annual RMDs, based on their life expectancies, in years one through nine, receiving the remaining balance in year 10. They cannot wait until the end of 10 years and take the entire account as a lump-sum distribution. The annual RMD rule would provide designated beneficiaries less tax-planning flexibility and could push them into higher tax brackets during those years, especially if they’re working. The 10-year rule and the proposed regulations left many designated beneficiaries who recently inherited IRAs or defined contribution plans confused as to when they needed to begin taking RMDs.

10-Year Rule Latest Guidance & Next Steps

The latest guidance extends relief by forgiving 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD. The relief means covered individuals will not be responsible for an excise tax equal to 25% of the amounts that should have been distributed but were not, or 10% if the failure to take the RMD is corrected in a timely manner. Plans will not be penalized for failing to make an RMD in 2023 that would be required under the proposed regulations.

We will continue to monitor the situation and keep you informed of any updates. For more information about the 10-year rule and how that affects your IRA planning, please contact your Janover professional or a member of the Janover team.

Leave a Reply

Your email address will not be published. Required fields are marked