The 2019 SECURE Act made big changes in how retirement plan assets must be distributed. While we still await final Regulations related to required minimum distributions (RMDs) from retirement plans, the IRS has now issued Notice 2022-53 affirming their position on required minimum distributions from inherited IRAs.
The SECURE Act defined a new class of beneficiary, the eligible designated beneficiary (EDB). It also introduced a new 10-year withdrawal rule for beneficiaries not falling in the EDB class - primarily non-spouse adult beneficiaries.
Based on how the SECURE Act was drafted, most retirement account commentators - and some IRS personnel - believed that the law did not require annual RMDs when the 10-year rule applies.
That's why many were surprised by Proposed Regulations issued in February. The Proposed Regulations require non-EDBs inheriting retirement accounts subject to the 10-year rule to take annual RMDs during years 1-9 of the 10-year period. This could be a serious problem, as missed RMDs are subject to a 50% excise tax penalty.
Fortunately, Notice 2022-53 waives the 50% excise tax penalty for certain missed 2021 and 2022 RMDs:
- If the account owner died in 2020 or 2021 and his death was on or after his required beginning date for retirement account distributions, and the beneficiary is not an eligible designated beneficiary, the IRS will not impose a penalty for missed RMDs.
- The waiver also applies to certain beneficiaries of an EDB if the EDB died in 2020 or 2021.
The notice says penalties on such missed RMDs will not be imposed until 2023 at the earliest. If a beneficiary already paid the penalty for a missed 2021 RMD, the beneficiary can request a refund from the IRS.
It is important to note that the penalty waiver does not apply to lifetime RMDs, inherited IRAs by eligible designated beneficiaries, or RMDs by beneficiaries who inherited retirement accounts before 2020.
Finally, while the Notice addresses waiver of the penalty, it does not state whether the RMD requirement itself was waived for those years. Missed RMDs for 2021 and 2022 might still need to be caught up. Hopefully, the final Regulations will clear this up. We’ll continue to watch developments in this area and will provide additional updates once the Final Regulations are issued.