IRS Is Waiving Penalties For Some Inherited Retirement Accounts — Is Yours One?

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The IRS announced that if you inherited a retirement account in 2020 or 2021, the 50% penalty will be waived for some heirs who need to start taking minimum distributions. This new rule won’t apply until the 2023 distribution calendar year.

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CNBC stated there is typically a 50% penalty when you avoid required minimum distributions (RMDs) or don’t take the full amount by the deadline. This is applied to the balance that should have been withdrawn.

Under the Secure Act of 2019, “non-eligible designated beneficiaries” have to deplete inherited retirement accounts within 10 years — known as the “10-year-rule.” These beneficiaries are heirs who aren’t a spouse, minor child, disabled, chronically ill or certain trusts. The rule applies to accounts inherited on Jan. 1, 2020 or later.

However, if the original owner already reached their required beginning date when RMDs must start, then heirs are required to take RMDs immediately.

According to Ed Slott of Ed Slott and Company, LLC, IRS Notice 2022-53 answers the “No. 1 question” that advisors and retirement industry officials have been asking about the proposed Secure Act required minimum distribution.

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The confusion “surrounded those beneficiaries who inherited in 2020 or later and were subject to the 10-year rule, where the entire inherited IRA balance would have to be withdrawn by the end of the 10th year after death,” Slott explained in an email to ThinkAdvisor.

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If you did pay the penalty for 2021, you can “request a refund of that excise tax,” the notice said.

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About the Author

Josephine Nesbit is a freelance writer specializing in real estate and personal finance. She grew up in New England but is now based out of Ohio where she attended The Ohio State University and lives with her two toddlers and fiancé. Her work has appeared in print and online publications such as Fox Business and Scotsman Guide.
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