IRS Delays New Guidelines for Inherited IRAs

The Internal Revenue Service said Friday it would delay enforcing new rules for making required withdrawals from some inherited retirement accounts until 2023 after taxpayers complained the changes were confusing.

The relief applies to taxpayers who inherited retirement accounts in 2020 or 2021, who the IRS required to make annual payouts immediately, rather than waiting until the end of a 10-year period to exhaust their accounts.

The new guidance doesn’t say it will waive the minimum annual distributions required, but by offering penalty relief it essentially means this group of taxpayers won’t have to take RMDs for 2021 and 2022, an IRS spokesman said.

These guidelines do not change the rules for spouses and certain other beneficiaries known as eligible named beneficiaries, including those with chronic conditions, who must continue to take annual RMDs. Even heirs who inherited accounts prior to 2020 will still be subject to the old rules, meaning they will make annual withdrawals over their expected lifetime. Most IRA owners aged 72 and over still have required withdrawals to make in 2022. There are strategies to lessen the pain of required withdrawals.

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If a taxpayer fails to make a required withdrawal, there is usually a 50% penalty, estimated at 50% of the amount that should have been withdrawn.

IRS policy states that if those taxpayers have not made a distribution, this penalty will not be assessed for 2021 and 2022. Any of those taxpayers who paid the penalty for a missed RMD in 2021 can apply for a refund, the IRS says.

Congress changed the rules for inherited retirement accounts in a 2019 law, requiring most taxpayers who have inherited accounts to empty the funds within 10 years, not during their lifetime as previously allowed. Then, in February, the IRS proposed rules requiring heirs to make annual payments during that 10-year period if the original owner was already subject to RMDs.

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The IRS said it received countless comments from angry taxpayers in response to the changes. Taxpayers who inherited in 2020 didn’t make any payouts in 2021 because they didn’t feel they needed to, and they weren’t sure they should in 2022.

The IRS said the final rules for inherited IRAs would come into effect in 2023 at the earliest.

Write to Ashlea Ebeling at [email protected]

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