In college, I had a buddy who fell in love and asked the woman of his dreams to marry him.
She said no.
A few days later, she said yes.
A month later, she said no.
She followed that by saying yes, making her an excellent first wife (he is now on number three).
The only other time I have seen more wavering was from the IRS linked to the Secure Act and their handling of the 10-year rule for inherited IRAs. The simple question we all had was whether a non-eligible designated beneficiary was subject to annual required minimum distributions.
On late Friday, October 7, 2022, the IRS issued Notice 2022-53 In this Notice, the Internal Revenue Service said it would waive the 50% penalty if a beneficiary, subject to the SECURE Act 10-year rule, did not take RMDs in 2021 and 2022 from their inherited IRA account.
This Notice may have provided definitive guidance to handling inherited IRA owners who received the IRA after January 1, 2020.
With the passage of the SECURE Act, the assumption was that the 10-year rule would work the same as the 5-year rule and the only required RMD would be at the end of the 10th year of the IRA owner’s death. Since the IRS did not comment differently, this was the basis of planning for financial advisors and their clients with newly inherited IRAs.
However, in March 2021, the IRS revised Publication 590-B on the distributions from IRAs and suggested that it would require annual RMDs to be paid in years 1-9 and the remaining IRA funds to be paid out in year 10.
But with a revision in May 2021, the IRS made clear they would not require annual RMDs, and we all took a deep breath of relief, feeling we now have a handle on the SECURE Act and the 10-year rule.
On February 24, 2022, the IRS made a new proposal. The proposal said that if you inherited a traditional IRA from someone who had already passed their required beginning date and taken their required minimum distributions, you have to take annual distributions in years 1 to 9. The custodian must distribute the balance of the inherited IRA in year 10.
This new proposed regulation blindsided financial and tax advisors, creating a significant issue. Failure to take the required minimum distributions carries a 50% penalty.
However, on Friday, the IRS Notice 2022-53 said the 50% penalty would not apply to this group of inherited IRA beneficiaries for 2021 and 2022. In addition, if the taxpayer paid the penalty for not taking the RMDs, the IRS could refund that penalty.
In our view, the IRS has made the right decision regarding this, and we can all now focus on the RMD for this class of IRA owners for 2023 and beyond.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Past results are not indicative of future performance and are no guarantee that losses will not occur in the future. Future returns are not guaranteed, and a loss of principal may occur.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/ Dealer. Member FINRA/ SIPC.
Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc