If you did not take your required minimum distribution from your inherited IRA in 2021 or 2022 because of the confusing messaging from the SECURE Act, and you fall into a specific class of beneficiary, you do not owe the usual 50% excise tax on RMD shortfalls.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) introduced a new 10-year rule for certain beneficiaries who inherit IRAs after 2019. Language from the SECURE Act suggested that distributions during the first nine years after the account owner’s death were optional, though the entire balance must be distributed by the end of the 10th year.
However, the proposed RMD regulations, published in February of 2022, explain that some beneficiaries must also take annual life expectancy RMDs under this new 10-year rule. In response to complaints from beneficiaries who would be subject to the 10-year rule plus the annual life expectancy RMD requirement but did not take RMDs for 2021 and 2022, the IRS has published Notice 2022-53, waiving the 50% excise tax that would otherwise apply.
Do You Benefit from This Waiver?
You benefit from this waiver only if you are one of the following two types of beneficiaries:
1. You are a designated beneficiary who inherited an IRA from the owner in 2020 or 2021, and the IRA owner died on or after their required beginning date (RBD). The RBD is April 1 of the year that follows the year the IRA owner reached age 72 (70 ½ if they reached age 70 ½ by December 31, 2019).
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Generally, a designated beneficiary is a beneficiary who is a person.
2. You are a successor beneficiary of an IRA for which the original beneficiary is an eligible designated beneficiary taking annual life expectancy distributions. And you inherited that beneficiary IRA in 2020 or 2021. An eligible designated beneficiary is one who, at the time of the IRA owner’s death, is one of the following:
(1) The surviving spouse of the IRA owner,
(2) a child of the IRA owner who has not reached the age of 21,
(4) chronically ill, or
(5) an individual not described above who is not more than ten years younger than the IRA owner.
For purposes that include this waiver of the 50% excise tax, an eligible designated beneficiary is also a designated beneficiary who inherited an IRA before 2020 and died after 2019.
Please consult with your advisor regarding whether you are a designated beneficiary, an eligible designated beneficiary, or a successor beneficiary for any IRA that you inherit.
This Automatic Waiver of the 50% Excise Tax
If you fall into either a. or b. above, you have annual RMDs due from the IRA, starting with the year following the year you inherit the IRA. This means that if you inherited the IRA in 2020, the years for which you are required to take annual RMDs include 2021 and 2022. And, if you inherited the IRA in 2021, the years for which you are required to take annual RMDs include 2022.
Generally, if you fail to take RMD amounts, you will owe the IRS an excise tax of 50% of your RMD shortfall. But, in this case- if you fall under a. or b. above, the IRS waives the excise tax. If you already paid the excise tax for 2021, you may request a refund from the IRS.
Do you have to play catch up?
If you fall under a. or b. above, you are not required to take the RMDs for 2021 or 2022 to avoid the 50% excise tax. Instead, you choose whether to take distributions of these amounts. But the amount/s will eventually be distributed by the end of the ten years or the end of your applicable life expectancy, whichever comes earlier. Additionally, unless otherwise permitted by the IRS, those amounts are still classified as RMDs and must not be included in any rollover from an employer plan.
Your Next Steps
While only IRA is mentioned above, RMD requirements also apply to employer plans such as 401(k), 403(b), and governmental 457(b) plans. These are covered by IRS Notice 2022-53 as well. Please consult your advisor about your RMD obligations for your retirement accounts, including any that you inherited.