One of the key provisions of the (SECURE) Act 1.0, enacted in December 2019, was the elimination of the so-called “stretch IRA” for certain non-spouse beneficiaries. The stretch IRA allowed IRA beneficiaries to take annual distributions from inherited accounts based on their single life expectancy, which in many cases extended the tax-deferred growth for many years or even decades.

While IRAs inherited prior to 2020 are “grandfathered,” accounts inherited in 2020 and thereafter are subject to more restrictive guidelines – namely, the 10-year rule, which effectively replaced the stretch IRA.

Generally, the 10-year rule stipulates that, unless the beneficiary meets one of several conditions (e.g., the beneficiary is not more than 10 years younger than the IRA owner has chronic illness, or is disabled), inherited IRAs must be distributed by the end of the 10^th year after the owner’s death. The good news is that beneficiaries have the flexibility to decide when distributions are taken during the 10-year period. For example, a beneficiary may decide to take a lump sum at any time, or discretionary distributions when and if needed, provided the account is fully distributed by the end of the 10th year.

In early 2022, the IRS issued proposed additional SECURE Act regulations for IRA distributions that many industry observers found surprising. The proposed regulations stated that if an IRA owner dies after the required distribution beginning date (April 1 of the year following the year the owner turns 72), then beneficiaries must take an annual distribution in years one through nine and fully distribute any remaining balance in year 10.

Several months later, in October 2022, the IRS announced that beneficiaries who were subject to but did not take an annual distribution in 2021 and 2022 would be exempt from the excise tax, which at that point was 50%. Most recently, in early July the IRS issued additional guidelines stating that beneficiaries who failed to take a 2023 distribution from certain inherited IRAs would once again be exempt from the (now 25%) excise tax.

It was widely anticipated that final regulations would have been issued in 2023 that would either eliminate or reaffirm that annual distribution requirement. Based on this latest development, however, it appears that while beneficiaries will be exempt from any penalties in 2023, we will have to wait until 2024 at the earliest for the IRS’s long-term position on the matter.

For now, impacted beneficiaries can rest easy that if they do not need to take a distribution, they can enjoy another year of tax deferral.

IMPORTANT INFORMATION

Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice.