Inherited an IRA? Here's What You Need to Know

Ever since the SECURE Act passed in 2020, there has been a certain amount of confusion over the effects this would have on taking distributions from an inherited IRA. The answer is finally here – or at least closer.

Here’s the backstory:

The SECURE Act effectively eliminated the Stretch IRA technique, which had allowed beneficiaries to stretch their minimum distributions from an inherited retirement account over their life expectancy.  Instead, the new law said most non-spousal beneficiaries of owners who died in 2020 or later would have to liquidate those accounts within 10 years of the death of the owner.  Spouses and some others were exempt, but accounts left to healthy grandchildren, adult children and others would be subject to the 10-year rule. This group was referred to as “non-eligible designated beneficiaries,” or NEDBs.

The IRS had also proposed that many of those NEDBs would also have to take required minimum distributions (RMDs) from their inherited IRAs during the first nine years after the owner’s death.  But now the IRS has delivered an update: Those NEDBs will not be penalized if they fail to take an RMD from inherited accounts at least through the end of 2023.

Despite this recent update from the IRS, there are a few things IRA beneficiaries should be aware of:

• The IRS didn’t specifically waive the RMD requirement for those affected beneficiaries. However, without a penalty in place for not taking the distribution, there appear to be no consequences – for now – to not withdrawing the RMD.
• This is also not a blanket waiver of RMDs for all account owners, so retirees beyond age 72 should still take their RMDs as planned.
  • This change does not affect those beneficiaries who are not subject to the 10-year rule, like surviving spouses and minor children. They remain subject to the same rules that were in place before the original SECURE Act.
• Even though distributions are not required for NEDBs in 2023, they may still want to take a distribution of some amount. The total taxes paid by the beneficiary may be lower by taking smaller withdrawals over more years.

But that’s not the end of the story, as the IRS still intends to provide final rules eventually.  Those rules could range from waiving the annual distribution requirement (but keeping the requirement to empty the account within 10 years) to requiring the prior-year RMDs to be withdrawn in 2024 to anything in between. Affected beneficiaries should continue to watch this issue and begin planning their strategy for depleting those accounts.

Our office will be following the IRS guidance for any further decisions in this space. If you have inherited an IRA – or expect to inherit one – check in with us to make sure your distributions are up to date.

Note: This article was originally published in November 2022 and was updated in July 2023.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.