RMD Rules from Secure Act Become Clearer- Kind of…
We finally have an answer to one of the most frequently asked questions of 2022,“Do people who inherited an IRA in 2020 or 2021, and who are subject to the SECURE Act’s new 10-Year Rule have to take a Required Minimum Distribution (RMD) this year.” The short answer is NO.
The original interpretation of the SECURE Act was that if you were a non-eligible designated beneficiary (essentially a non-spouse) of an IRA and the decedent died after 2019, you were subject to the 10-Year Rule. The 10-YR rule requires you to distribute the entire account within 10 years of the death of the original account owner.
Then, earlier this year the IRS proposed new rules saying that if the decedent was already taking RMDs at the time of their death, their heirs would have to make annual required minimum withdrawals in each of the 10 years after death. The IRS was very vague on the rules around the distributions, creating substantial confusion and fear of major penalties for non-compliance. Currently, the penalty for not taking a Required Minimum Distribution, or RMD is 50% of what the RMD should have been.
Finally, we received partial clarity on the issue with IRS Notice 2022-53, stating that beneficiaries subject to the 10-Year Rule don’t have to worry about taking any RMDs from the inherited accounts in 2021 or 2022. The guidance says that they will not assert a penalty for 2021 or 2022 if there were no distributions taken.
While we still don’t know what the rules will be in future years, we are relieved to know that distributions will not be required until at least 2023. The IRS may still impose them down the road, so we will follow their guidance closely.
With that said, just because a beneficiary doesn’t have to take an RMD this year, does not necessarily mean that they shouldn’t. Many individuals will benefit from taking voluntary distributions in 2022 to avoid taking a larger future distribution that is taxed at a higher rate. Our goal in planning is to try and pay taxes at the lowest rate possible. This can sometimes mean paying taxes sooner than necessary at lower rates to avoid higher rates in the future.
Each client’s circumstances are unique. Please let us know if you would like to discuss your personal situation to determine which strategy is best for you.
Compass Asset Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.