The Internal Revenue Service (IRS) released guidance (Notice 2022-53) on October 7, 2022 which delayed the implementation of the final regulations for required minimum distributions (RMDs) on inherited defined contribution and IRA accounts until 2023 and issued a special rule RMD rule for 2021 and 2022. This guidance only applies to accounts inherited beginning in 2020.
Prior to the federal SECURE Act that was enacted on December 20, 2019, if a participant in a 401k Plan or other defined contribution benefit plan died before taking required minimum distributions, a beneficiary had the option of distributing the account balance over 5 years or over their life expectancy beginning no later than one year after the date of death of the deceased participant. Those beneficiaries electing to take distributions over a five-year period could do so anytime within the five years.
After the SECURE Act, the beneficiary is required to distribute the account balance over a 10-year period if the participant died after December 31, 2019 with certain exceptions. Exceptions to the beneficiary distribution rules include beneficiaries who are surviving spouses, minor children, disabled and chronically ill persons. These excepted beneficiaries are known as eligible designated beneficiaries.
For those who are not eligible designated beneficiaries, RMDs will be required to be made each year starting in 2023 by the beneficiaries of inherited accounts over the 10-year distribution period. This RMD requirement will be different from the five-year rule prior to the SECURE Act, when you can distribute the account balance any time during the five years. Those inherited benefit plan and IRA account holders failing to make a RMD will be subject to a 50% excise tax. Final regulations will be issued by the IRS in 2023.
There is good news for those who inherited plan benefit plan and IRA accounts in 2020 and 2021 and failed to take the RMD in 2021 and 2022. The IRS has issued a special rule where no excise tax will be asserted on missed RMDs for these two years. Additionally, if you have already paid excise tax on a 2021 distribution on an inherited account, you can request a refund.
If you inherited a 401k or IRA account prior to December 31, 2019, the SECURE Act rules do not apply to your inherited account