The IRS is offering a break to taxpayers who are required to take certain specified required minimum distributions (RMDs) for 2024. This is part of an ongoing effort by the IRS to help taxpayers navigate the rules related to inherited IRAs. RMDs are amounts that retirement account holders are required to withdraw each year after reaching a certain age, which is now set at 73 but will increase to 75 in 2033.
The rules regarding inherited IRAs have become more complex due to the SECURE Act, which changed the way beneficiaries can withdraw funds from these accounts. Under the new 10-year RMD rule, beneficiaries must withdraw all assets from an inherited IRA within 10 years of the original owner’s death. However, some beneficiaries misunderstood the rules and believed they could wait until the end of the 10-year period to make a complete withdrawal, instead of taking annual distributions.
To address this confusion, the IRS issued a proposed guidance in 2022 that clarified beneficiaries subject to the 10-year RMD rule must continue to take annual distributions after the IRA owner’s death. Failure to comply with these rules can result in substantial penalties, up to 25% of the required amount. This caused frustration among taxpayers and financial professionals.
In response to these concerns, the IRS provided transitional relief in 2022 by allowing taxpayers who missed RMDs related to an inherited IRA in 2021 or 2022 to avoid extra taxes or penalties. The relief was extended in 2023 and now again in 2024, with the final regulations not applying until the 2025 distribution calendar year. This relief applies to RMDs that would have been required if the IRA owner had died in 2020, 2021, 2022, or 2023.
The IRS plans to issue final regulations related to RMDs for calendar years beginning in 2025, providing more guidance to taxpayers on how to comply with the rules. With the ever-changing landscape of retirement account rules, especially with the SECURE Act and the SECURE 2.0 Act, it’s important for taxpayers to stay informed and seek advice from tax or financial professionals to avoid costly mistakes. The relief provided by the IRS aims to give taxpayers some breathing room as they navigate these complex regulations related to RMDs and inherited IRAs.
