There was a time, back before 2020, when the rules covering people who inherited traditional IRA accounts were simple. Before the SECURE Act was passed, people could spread out their distributions from these inherited retirement accounts over their lifetime, using a simple mortality table. (No, not totally simple, but . . .) These were the famous “stretch” provisions which made it possible to reduce the annual tax bite on the amount received.
Then SECURE Act forced the IRA inheritors to take all the money out within ten years, but under the original rules, they could wait until the day before the ten years expired to take a full distribution. That might not be optimal from a tax standpoint (bunching all the distributions in a single year would put you in a higher tax bracket), but at least it was uncomplicated.
Then came IRS interpretations, and the IRS has finally issued finalized rules, which have made the lives of some IRA inheritors weirdly complicated.
Under the rules, if a person inherits an IRA from someone who died before he/she was taking required minimum distributions (RMDs), then that person has the flexibility to take the money out at any time during the 10-year period, probably taking some amount each year to smooth out the taxes. The requirement is all the money must come out within ten years.
But if the deceased IRA owner had been taking required minimum distributions, then the beneficiary would fall under an “at least as rapidly” (ALAR) rule, which means that the beneficiaries would have to continue taking annual required minimum distributions at least as high as what the previous owner had been taking. At the end of the tenth year, any remaining assets would have to be distributed in full.
As before, the distributions are calculated as a percentage of the value of the IRA as of December 31 of the prior year, and distributions are required by December 31 of the current year.
The IRS conceded that the rules were muddled prior to the new finalized roles and agreed to waive all penalties for not taking these distributions during the 2021-2024 period which essentially waived the requirement to take them at all. People who did not take those distributions may do so, but that is optional; and the decision should probably be made in light of tax considerations.
As they weigh their options, they will probably wish that the account owner had converted their traditional IRA to a Roth IRA. The Roth accounts don’t require distributions up to the tenth year, and there are no taxes on those distributions.
This rule clarification is on our radar. The financial advisors and operations team are discussing how to best track and handle these new required distributions moving forward so you can continue focusing on living your life while we handle your accounts.
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