IRS Mulling Additional Changes for Non-Spouse Inherited IRAs
By Janet Hoffmann, CFA, CFP®
May 2, 2022
Two years after making significant, often unclear and even confusing changes to Required Minimum Distribution (RMD) schedules for non-spouse inherited IRAs, the IRS recently issued a proposal with additional guidance, which may come as an unpleasant surprise to many. The proposal will likely not be finalized until later this year, but the following updates pertaining to non-spouse inherited IRA RMDs are being considered.
Congress passed the SECURE Act in 2019 which directed anyone inheriting a non-spouse IRA (for example, from a parent) as of January 1, 2020 to take the entire balance out within 10 years as a distribution, all subject to ordinary income taxes. This provision was implemented to expedite tax receipt of distributions. Previously, any IRA inherited before January 1, 2020 would allow a recipient to stretch distributions over their lifetime.
Because the 2019 rules provided no guidance on the timing of these distributions, many advisors, including us, did the best we could with this dramatic change. If a client was currently in a high tax bracket but was looking to retire within the 10-year period, we might have suggested taking larger RMDs toward the end of the 10-year period, after confirming with their CPA, to optimize distributions from tax and cash flow standpoints. With the IRS now saying distributions must be taken each year, they have removed any flexibility to mitigate what could be a large tax hit to those who do not need to take distributions.
With regard to inherited Roth IRAs, the 10-year rule is in place but there is no current proposal to require an RMD each year (inherited Roth IRA RMDs are not taxed).
These rules are currently in the “proposal” phase (so not currently required) but are a direct reversal from previous guidance. In May 2021, the IRS stated “annual RMDs would not be required under the new 10-year rule.”
What does this mean for those who did not take an RMD from an Inherited IRA that falls under the 10-year rule? They are exempt from any changes in 2020 since no RMDs were required that year. If they skipped an RMD in 2021, they should check with their tax professional who may tell them to take two RMDs now: one for 2021 and one for 2022.
Because this guidance is still in the proposal phase, we will be keeping a close eye on developments to make sure we are clear on distribution deadlines.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
