IRS delays new guidelines for inherited IRAS • Find out all the details here

Once again, the Internal Revenue Service (IRS) announced that it will delay the implementation of new rules related to the required minimum distribution (RMD) of inherited retirement accounts (IRAS). This is set as relief for those who inherit or own these accounts.

After the delay in 2022, many heirs and owners were confused about the timing of payment and some rules. In addition, the new release explains that beneficiaries are subject to a new 10-year withdrawal deadline and will not face penalties if they do not make the required minimum withdrawals by 2023.

As you will see, there is a lot of news regarding the IRS: it is not enough to know how to contact the IRS to pay your taxes, or whether Puerto Ricans pay federal taxes. There is even news about the IRS health subsidy program – FEHB Plans and Services. But the news this time is a different topic.

Transition Relief and Guidance Relating to Certain Required Minimum Distributions

Notice N-2023-54 is entitled: Transition Relief and Guidance Relating to Certain Required Minimum Distributions, which explains the new guidelines on the vesting conditions of inherited retirement accounts. This document is addressed to the owners and beneficiaries of this type of plan, as well as employers and administrators.

This document clarifies some points that generated confusion among the public after the enactment and publication of the SECURE 2.0 law and Notice N-2022-53. Although some experts state that there are still issues to be clarified, the 2023 notice is more specific in certain aspects, rollover periods, and the age of applicability.

What are the changes for inherited IRAs in 2023?

More than changes, they are a relief for those who mistakenly or out of confusion did not make the required withdrawals and rollovers, like beneficiaries who mistakenly made a minimum withdrawal before the required age or an heir who did not meet the required minimum distribution within the required time frame.

If you incurred any of these offenses, N-2023-54 is certainly a relief for you. It is also important for you to consider learning more about this notice if you are an employer. However, these are the most important points:

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Age of applicability

The SECURE 2.0 law introduced the change in the age at which you must apply for this type of retirement plan (from 72 years old to 73 and 75 years old); however, many users were not clear about when or how it would apply, so the N-2023-54 stipulates that it must be applied on April 1 of the year following the year in which the user reaches the required age.

Distribution of the entire interest

N-2023-54 also makes reference to how it should be and from when the beneficiary’s entire interest should begin, for this purpose, the life expectancy of the employee to be benefited or their heir should be considered.

Likewise, the notice makes clarifications in the event of the death of an employee who is receiving the RMD. If they die before receiving it, it must be distributed during the five years following their death or be distributed to the beneficiary at the latest one year after the employee’s death.

Excise tax

This notice also clarified that those who during 2023 did not make the required minimum distribution or did so for a lesser amount, will not have to pay the excise tax of 25% of the total RMD. In addition, it also explained that for those who manage to make the correction in the stipulated time, the excise tax will be reduced to 10%.

Can I wait 10 years to take a distribution from an inherited IRA?

The Ten-year-rule stipulates that the beneficiary who inherits the IRA must make minimum withdrawals from the account for a decade. However, certain conditions apply to this rule, since the SECURE 2.0 law changed the scenarios. Here is the list of those who can benefit from the IRA based on their life expectancy:

  • Widow/widower
  • Family member with a disability or chronic illness
  • Children who have not reached the age of majority
  • A person not younger than this term

Otherwise, the heir must withdraw the full amount within 10 years of the account owner’s death and this is made clear in N-2023-54. If the designated beneficiary dies and a portion of the pension continues to exist, the beneficiary of the designated beneficiary must withdraw the remainder within 10 years of their death.

Another thing you should know is that if the designated beneficiary was a minor and the child of the IRA owner, upon reaching the age of majority, they will no longer be considered an heir and will have 10 years to withdraw the remaining portion.

What is the difference between an inherited IRA and a beneficiary IRA?

Both terms refer to the IRA once the owner has passed away since it will benefit whoever that person has decided to designate as heir or beneficiary. To make use of this retirement plan, you should consider getting advice so that you know in depth the conditions of use of the inherited retirement account.