Guest Blog: IRS Update from Cetera Financial Group®

IRS Update: Understanding the 10-Year Rule for Inherited IRAs and Qualified Accounts

The Internal Revenue Service (IRS) has provided another update to the rules governing IRAs and qualified accounts. On July 14, 2023, the IRS issued Notice 2023-54 that announced the following:

• Final Regulations will apply to distributions starting in the calendar year 2024.
• Missed RMDs from Inherited qualified accounts and IRAs are forgiven and not subject to excise tax if the original owner died after RBD in years 2020, 2021, and 2022 and the beneficiary has 10 years to distribute the qualified account.

Background and Overview

When the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was enacted on December 20, 2019, among other things it divided individuals who inherited IRAs and qualified retirement plans into Eligible Designated Beneficiaries and Non-Eligible Designated Beneficiaries.

The categories of Eligible Designated Beneficiaries (EDBs) are:

• Spouse.
• Beneficiary not more than 10 years younger than account owner
• Disabled or chronically ill individual.
• Minor child (until they reach the age of majority or 21 years old if that remains in the Final Regulations).

• Beneficiary of an owner who died before January 1, 2020.

These individuals have no change in how their RMD is calculated, and they have their life expectancy to distribute inherited accounts.

The other beneficiaries were classified as Non-Eligible Designated Beneficiaries. These individuals have:

• 10 years to distribute an Inherited qualified retirement account or Inherited IRA.

For example, if you inherit an IRA from your sister who is 3 years older, you can use your own life expectancy to stretch distributions from your Inherited IRA. But if an individual inherits an account from a parent, they have 10 years to empty the account.

On February 24, 2022, the IRS added another layer of complexity when it issued proposed regulations clarifying the 10-year rule introduced by the SECURE Act. It stated that individuals who inherited IRAs from owners who died after the Required Beginning Date (RMD age) will have to make distributions using their life expectancy in years 1 to 9 following the year of death and distribute the remainder of the account in year 10 following the year of death.

The Treasury Department and the IRS provided a 90-day comment period for the proposed regulations. Some individuals who are owners of inherited IRAs or are beneficiaries under defined contribution plans submitted comments indicating they thought the new 10-year rule would apply differently than it would under the proposed regulations. Specifically, these commenters expected that, regard less of when an employee (owner) died, the 10-year rule would operate like the 5-year rule, such that there would not be any RMD due for a calendar year until the last year of the 10-year period following the specified event.

Commenters asserted that if final regulations adopt the interpretation of the 10-year rule set forth in the proposed regulations, the Treasury Department and the IRS should provide transition relief for failure to take distributions that are RMDs due in 2021 or 2022.

In response to the comments received on the proposed regulations, the Treasury Department and the IRS issued Notice 2022-53 in October 2022. It announced that the final regulations will apply no earlier than the 2023 distribution calendar year and provided relief from excise tax on missed RMDs from Inherited qualified accounts.

In 2022, Congress passed SECURE Act 2.0. It increased the Minimum Required Distribution age to age 73 starting in 2023. Plan administrators and other payors who process and distribute RMDs to individuals through automated systems indicated they would need more time to reflect the change in the required beginning date.

In response, Notice 2023-54 now allows individuals, who were born in 1951 and received a distribution from an IRA that was characterized as RMD, to roll the money back over into an IRA as a 60-day rollover before September 30, 2023. The distributions must have been made between January 1 and July 31, 2023.

If an RMD was distributed by mistake, there is a relief, and the funds can be rolled back over into an IRA or a qualified plan. It will count as a one-per-year 60-day rollover. If an individual already utilized a one-per-year 60-day rollover, they are still allowed to use this notice to roll the RMD back into a qualified account or an IRA.

Prepared by Zarina Sullivan

Senior Advanced Planning Consultant, Advanced Planning Group

Cetera Financial Group^®

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

 “Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), and Cetera Financial Specialists LLC. All firms are members FINRA/SIPC. Cetera Financial Group is located at 2301 Rosecrans Ave, Suite 5100, El Segundo, CA 90245. Advisors affiliated with Cetera are either registered representatives offering only brokerage services or are investment adviser representatives who can also offer advisory services.