IRS waives penalties inherited from retirement account

FG Trade /

The IRS has announced that if you inherit a retirement account in 2020 or 2021, the 50% penalty will be waived for certain heirs who must begin receiving minimum distributions. This new rule will not apply before the distribution calendar year 2023.

See: Keep jumping between tasks? It can destroy your retirement potential
Explore: 7 Surprisingly Easy Ways to Reach Your Retirement Goals

CNBC said there’s usually a 50% penalty when you avoid required minimum distributions (RMDs) or don’t take the full amount by the deadline. This is applied to the balance that should have been withdrawn.

Under the Secure Act of 2019, “non-eligible designated beneficiaries” must exhaust inherited retirement accounts within 10 years – known as the “10-year rule”. These beneficiaries are non-spouse heirs, minor children, disabled, chronically ill or certain trusts. The rule applies to accounts inherited on January 1, 2020 or later.

However, if the original owner has already reached the required start date when the RMDs must begin, the heirs are required to take the RMDs immediately.

According to Ed Slott of Ed Slott and Company, LLC, IRS Notice 2022-53 answers the “No. 1 question” that advisors and retirement industry officials have asked about the minimum required distribution proposed by Secure Act.

The confusion “surrounded beneficiaries who inherited in 2020 or later and were subject to the 10-year rule, where the entire inherited IRA balance would have to be withdrawn at the end of the 10th year after death,” Slott explained in an email to ThinkAdvisor.

Preparation: 29 Careless Ways Retirees Waste Money
Find: How to avoid taking early withdrawals on your 401(k) and IRA

If you paid the penalty for 2021, you can “claim a refund of that excise tax,” the notice says.

More from GOBankingRates

Comments are closed.