ALERT: This May Be Your Last Chance to Avoid Penalties On Inherited IRAs

The SECURE Act (Setting Every Community Up for Retirement Enhancement) of 2019 significantly changed a number of rules governing retirement accounts and minimum distributions from them.  Certain non-spouse inheritors of IRAs were among those most affected.  Previously, under so-called “stretch” provisions, such individuals were allowed to take required minimum distributions (RMDs) based on their own life expectancies – and even pass them along to their own heirs.

SECURE eliminated stretch provisions and required IRAs inherited after January 1, 2020 to be zeroed-out within 10 years.  Further guidance from the IRS stipulated that distributions must be taken in years one through nine with only the remaining balance distributed in year ten, rather than taking a lump sum in the final year.  Failure to take these distributions resulted  in a 25% excise tax on top of any other applicable taxes for years prior to 2023.

For the past couple of years, the IRS has waived this penalty, provided that individuals work to come into compliance with the law.  Recent guidance extended this grace period through tax year 2024, but indicated that this is likely to be the last year.  However, for years after 2023, the excise tax rate is no greater than 10% in most cases (Secure Act 2.0).

If you inherited an IRA from someone who died after 2020, you will want to ensure that you are in compliance with the RMD requirements.  Exceptions apply to:

  • Surviving spouses
  • Children younger than the “age of majority”
  • Individuals with disabilities
  • Chronically ill individuals
  • Individuals who are no more than 10 years younger than the account owner

Your AKM CPA will be happy to help you determine whether you are in compliance – and the best path for getting there.

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