2 sets of rules for IRAs
Do you ever feel like two separate rules apply: one for other people, and then a different and not so favorable one for you?
If you inherited an IRA from someone other than your spouse, there actually are two separate rules to be followed. One applies to those who inherited the funds before 2020, and a separate rule for those who inherit an IRA after 2019.
Why the difference, you may ask? It’s due to the adoption of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
Prior to the SECURE Act, you were generally required to withdraw the inherited IRA funds over your expected lifetime. This allowed you to “stretch” distributions and their associated tax impact over an extended period of time.
But that all changed when the SECURE Act was adopted. For those of you who inherited an IRA after 2019, you are now required to withdraw the full value of the IRA within 10 years.
This may seem simple enough, but the IRS was not exactly clear about how funds were to be received over that 10-year period.
Initially, it was thought that if you inherit a non-spousal IRA, you could strategically minimize the tax impact by deciding when to take funds within the 10-year time frame, such as during a low earnings year (or low profits for business owners), or hold off until an upcoming retirement when your income stops.
Another attractive option was to wait until year 10 and withdraw all the funds, thus allowing for greater potential growth by staying invested. The goal was to find a way to minimize the tax impact of reporting the inherited IRA income, or to maximize the investment of the funds, or possibly both.
But then on Oct. 7, 2022, the IRS released Notice 2022-53 that required beneficiaries to take distributions in years one through nine instead of waiting until year 10. Relief was granted for prior years based on the late issuance of such notice.
Now the IRS has just announced a ruling on July 14 that it will continue to grant relief of any required distribution amount for 2023. While this relief is helpful for the current year, it doesn’t put an end to the confusion regarding the rules for the future and further guidance is still needed beginning in 2024.
Confused yet? Well, there’s more.
The SECURE Act also extended the age at which you are forced to begin taking distributions from your own (non-inherited) IRAs.
The age was historically 70½, then was increased to age 72 under the SECURE Act, then age 73 under the SECURE Act 2.0.
This means folks turning age 72 this year are not required to begin taking mandatory distributions until next year when they turn age 73. The SECURE Act 2.0 actually extends the age all the way out to age 75 for those born in 1960 or later.
The confusion and timing of notification of these changes caused some 72-year-olds to erroneously take distributions this year that they otherwise would not have wanted to take.
To correct this, the just-announced IRS Notice 2023-54 extends the normal 60-day timeline for rolling over (returning) the money to their IRA account thus avoiding the tax bill. You now have until Sept. 30 if you want to return that distribution to your IRA.
This isn’t the first time IRS changes to our very complicated tax code has caused confusion, lacked direction, and provided temporary relief. Like so famously stated by Yogi Berra, “It’s like déjà vu all over again.”
Bennett Associates is a registered investment adviser. The information provided here is the opinion of the author and is offered for informational purposes only.
