IRS Notice 2023-54 and Your Inherited IRA

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the regulations for individuals inheriting Individual Retirement Accounts (IRAs). These changes replaced long-standing rules, creating uncertainty for beneficiaries regarding new distribution requirements. In response, the Internal Revenue Service (IRS) issued transitional guidance in 2022, 2023, and 2024 to provide relief and clarify obligations for certain beneficiaries.

The Post-SECURE Act RMD Confusion

Before the SECURE Act, most non-spouse beneficiaries could take distributions from an inherited IRA over their own life expectancy, a strategy known as the “stretch IRA.” The SECURE Act largely eliminated this, replacing it with a 10-year rule that requires the entire account balance to be withdrawn by the end of the tenth year following the owner’s death. This change introduced a point of ambiguity.

The confusion centered on whether annual Required Minimum Distributions (RMDs) were necessary during the 10-year period. This was particularly relevant if the original IRA owner passed away on or after their required beginning date (RBD), which is the date they must start taking their own RMDs. The uncertainty arose from the interaction between the new 10-year rule and a pre-existing “at least as rapidly” rule, which suggested that if the owner had started RMDs, the beneficiary must continue them.

The SECURE Act also created different beneficiary categories. “Eligible Designated Beneficiaries” (EDBs) can still use a life-expectancy payout. This group includes the surviving spouse, minor children of the account owner, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the decedent. In contrast, most other individual beneficiaries, such as adult children, are classified as “Designated Beneficiaries” and are subject to the 10-year rule.

The IRS released proposed regulations in February 2022 confirming that annual RMDs were required for Designated Beneficiaries if the original owner died after their RBD. This meant these beneficiaries had to take annual withdrawals based on their life expectancy in years one through nine, in addition to emptying the account by year ten. This created a situation where many who inherited accounts in 2020 and 2021 had unknowingly failed to take a required distribution.

A Series of IRS Penalty Relief Notices

In response to the hardship caused by the proposed regulations, the IRS issued a series of notices providing ongoing relief. This relief waives the 25% excise tax, outlined in Internal Revenue Code Section 4974, which is levied on any RMD amount not withdrawn in a timely manner.

This pattern of relief began with notices for the 2021 and 2022 tax years. Most recently, in April 2024, IRS Notice 2024-35 extended the penalty relief through the 2024 tax year.

The relief is narrowly targeted. It applies to Designated Beneficiaries subject to the 10-year rule who inherited an IRA from an owner who died in 2020, 2021, 2022, or 2023, after that owner had reached their own required beginning date. For this group, any annual distribution that would have been required for 2024 is waived, and they will not be penalized for failing to take a withdrawal from their inherited IRA for the 2024 tax year.

Impact on Affected Beneficiaries

The ongoing IRS guidance provides another year of reprieve for a specific group of beneficiaries. For instance, if you are an adult child who inherited a traditional IRA in 2021 from your 80-year-old father, you would have been required to take an RMD for 2024 under the proposed rules. The IRS notices mean you do not have to take that distribution and will not face a penalty.

This relief extends to inheritances from 2020 through 2023 where the original owner had passed their RBD. For example, someone who inherited an IRA in 2023 from an 85-year-old relative is excused from taking their first potential RMD in 2024.

The relief is strictly for the annual RMDs within the 10-year window; it does not alter the ultimate deadline. Every beneficiary subject to the 10-year rule must still withdraw the entire account balance by December 31st of the 10th year following the year of the original owner’s death. For an inheritance from 2023, this deadline is December 31, 2033. The notices only remove the requirement and penalty for annual withdrawals through 2024.

Planning for Future Inherited IRA Distributions

Beneficiaries must recognize that the relief provided by the IRS is temporary. The IRS has stated that the final regulations are anticipated to apply no earlier than the 2025 calendar year. This means the period of waived RMDs is expected to end, and beneficiaries who have been granted this relief should prepare for new requirements.

Beginning in 2025, affected Designated Beneficiaries should anticipate needing to take annual RMDs if the original account owner died after their RBD. These distributions will likely be calculated using the beneficiary’s single life expectancy factor from IRS tables for the first distribution year, then reducing that factor by one for each subsequent year. This is in addition to the mandate to liquidate the account by the 10-year deadline.

Given the temporary nature of the relief, proactive planning is necessary. Beneficiaries impacted by this situation should consider consulting with a qualified tax professional. A professional can help accurately calculate the potential RMD for 2025 and develop a tax-efficient strategy to manage the withdrawals and meet the final 10-year liquidation requirement.