On Friday the Internal Revenue Service announced it would continue to delay enforcing relatively new rules for inherited retirement accounts.  The result of the delay is that some accountholders will be able to forgo taking a distribution for 2023.

Prior to 2019 people who inherited retirement accounts could “stretch” distributions over their lifetimes.  In 2019 Congress changed the rules so that most taxpayers other than spouses would have to withdraw the full account balance within 10 years.

Prior deferrals of the mandatory distribution rules (2021 and 2022) relate to confusion over the timing of withdrawals.  Yes the full account must be distributed within 10 years but does that mean a required minimum in each year or could an accountholder withdraw nothing for 9 years and then the full account value in year 10?  No one seems to know.

For the sake of accuracy (and to be overly technical) the recent announcement does not say the annual required minimum distributions are waived.  Instead the IRS is offering penalty relief.  Essentially anyone who “should” but does not take a distribution will not be penalized 25% of the amount that otherwise should have been withdrawn.

Other points to note:

  • Rules do not change for spouses and other “eligible designated beneficiaries” who generally must still take required annual minimum distributions over their expected lifetimes.
  • Heirs who inherited accounts before 2020 are still subject to the old rules and generally must take annual minimum distributions over their expected lifetimes.