The Internal Revenue Service (IRS) often updates the rules on taking required minimum distributions (RMDs) from retirement accounts such as individual retirement accounts (IRAs) and 401(k)s. The rules were complicated and confusing—particularly for those who inherited retirement accounts, leaving them uncertain about what to do.
Because of the complications, the IRS did not issue any penalties for failing to withdraw the required amount or taking any withdrawals during 2022. This exception only applied to some inherited IRA RMDs during 2020 or 2021.
RMDs for Inherited IRAs
Typically, withdrawals are required for people that inherited IRAs from people that died during 2020 or 2021. The IRS notice delayed the requirements for non-eligible designated beneficiaries (NEDBs). NEDBs are people other than spouses, minor children, chronically ill or disabled, and some trusts. TheStreet said that NEDBs are also not required to make an RMD for 2022 if the owner died after the required starting date.If the inherited IRA belonged to someone that was already receiving RMDS, CNBC reports, no exception is permitted. All funds in the IRA must be depleted within the 10-year limit, and they must start getting RMDs immediately.
It is not necessary to withdraw any money from Roth accounts. There are no required minimum withdrawals for these accounts. It will be necessary, Investopedia says, to pay taxes on any money rolled into the new Roth account. Taxes on rollovers can be reduced by rolling over smaller amounts each year before you turn 72—instead of doing it all at once. No taxes need to be paid when you take a withdrawal.
Time Given to Return RMDs Already Withdrawn
Some beneficiaries already had withdrawals made for them in 2023, according to earlier age requirements. Some plan administrators sent RMDs, but mistakenly, because the RMD change went from 72 to 73 for people born during 1951.The IRS put out Notice 2023-54 which stated that people who had already received withdrawals for the year did not need to do so. If they did not want it and received it between Jan. 1 and July 31, 2023, they have until Sept. 30, 2023, to return the money to their accounts and will not suffer any penalties.
If you have been charged a penalty for failing to get an RMD and paid it to the IRS, you can get a refund. CNBC says that you just need to ask the IRS for a refund of the penalty amount from the IRS.
The Required IRA RMD Age
When the Secure 2.0 Act was passed, it changed the IRA RMD age to 73. Before the change, RMDs had to begin at age 72. Before long, the age at which withdrawals must begin will increase to 75.The earlier version of the Secure Act passed in 2019, and ended the ability of beneficiaries to withdraw money from these retirement accounts during the remainder of their lifetime. Now, they would be given up to 10 years to empty the account. It all depended on their age, date of death, spouse, no-spouse, designated, non-designated, etc.
The RMD Penalty for Failing to Withdraw
Before the Secure 2.0 Act, failure to make the RMD requirements incurred a penalty of 50 percent of the amount you failed to withdraw. If the account is large, it can be a very hefty sum. Secure 2.0 reduced the penalties, according to CPAPracticeAdvisor.com, ranging from 10–25 percent.The Five-Year Rule
If you inherit an IRA or a Roth account, there is a five-year rule that applies to contributions and withdrawals. Even though contributions can be withdrawn at any time, you cannot withdraw any interest before the five-year mark of the account. If you do, you must pay taxes and a 10 percent penalty.The five-year mark begins on January 1 of the year you open the Roth account—even if it is opened later during that same year. Accounts opened at any other time, including those opened to roll over inherited IRAs into your name, must also meet the five-year mark before you can withdraw any money without a penalty.
An exception to this rule is that the original owners of the Roth IRA accounts do not need to take any RMDs. The beneficiaries who inherit the IRAs or 401(k)s do need to take RMDs.
Some exceptions exist if you have a Roth IRA and have held the account for at least five years. NerdWallet says you can take a distribution and not have to pay taxes or a penalty if you are at least 59½, are the beneficiary of a deceased account owner, are going to use up to $10,000 for the purchase of your first home, or if you are disabled (permanently and totally).
Beneficiaries of a Roth IRA have slightly different rules for withdrawals, the AARP says. They are not required to take withdrawals every year, but they must empty the account within 10 years.
Advantages of Taking Multiple Withdrawals
Taking your withdrawals over several years can have a strong advantage over getting a lump sum. Getting a lump sum, especially if it is a large account, would likely put you into a higher tax bracket. If so, you will pay more taxes than you would if you took multiple withdrawals.Letting the Money Grow
Even though there is a 10-year requirement for withdrawals for beneficiaries, you can stretch it out over 11 years. It will make the withdrawals smaller, but you will see more growth in the account. The AARP says you can do this if you take the first withdrawal in the same year the original owner died. Then, you can make 10 more withdrawals in the next 10 years.If you have an inherited IRA, get financial advice from a financial counselor or talk to your plan administrator about the latest IRS updates. They can look over your situation and give advice on how to reduce your taxes when you take RMDs or need investment advice.
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