IRS again defers minimum distribution penalty for IRA beneficiaries

For the fourth year in a row, the the Internal Revenue Service has punted on the matter of required minimum distribution (RMD) penalties for IRA beneficiaries under the vaunted 10-year rule.

In a recent announcement, the IRS again waived the RMD penalty requirements for beneficiaries who were subject to the rule, which mandate that the entire inherited IRA balance be withdrawn by the end of the 10th year after death.

In 2022, the IRS proposed mandatory yearly withdrawals if the original account owner had already started distributions. But as questions arose, the IRS waived the penalty for missed required minimum distributions, and on April 16 extended that relief for 2024.

Before the SECURE Act of 2019, heirs could stretch retirement account withdrawals over their lifetime, which reduced year-to-year tax liability.

“While the IRS has deferred assessing the penalties, it has not wavered on the requirement that the inherited IRA must be liquidated within 10 years of death,” said Joe Buhrmann, senior financial planning consultant at Fidelity’s eMoney Advisor. “A non-spouse who inherited an IRA in 2020 hasn’t had to take a withdrawal nor have they had to pay a penalty for failing to do so, but that hasn’t changed the fact that the account still needs to be liquidated within the 10-year timeframe.”

Larger distributions may be necessary

As a result, Buhrmann said, the beneficiary in that case may now need to take larger annual distributions to draw down the account, resulting in, potentially, paying more in taxes as they are pushed into a higher tax bracket.

“Depending on your current tax situation, it may make sense to begin withdrawals now rather than waiting,” he said. “Factor in the anticipated sunsetting of lower tax rates (and their replacement with higher tax rates) in 2026 from the Tax Cuts & Jobs Act, it could make for a nasty surprise.”

The IRS said that 2024 would be the final year the penalties will be waived.

“All inherited IRAs will be required to withdraw the mandatory distributions in the future years for any IRAs inherited since the rule change,” said Stephen Kates, principal financial analyst for Annuity.org.

Tax strategy implications

Indeed, while the RMD relief sounds good, it might not be a good long-term tax strategy for beneficiaries.

It might be better for beneficiaries to take distributions throughout the 10-year term, even if not required, tax experts say, in order to balance out the overall tax bill and take advantage of the current low tax brackets. These current tax brackets remain for only this year and next unless Congress acts. Tax rates are scheduled to increase in 2026.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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