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Penalties still apply for some missed 2021 and 2022 distributions from inherited retirement accounts

The IRS issued Notice 2022-53 on December 7, 2022, announcing it would waive 50% penalties for required distributions that were missed during 2021 and 2022 from inherited retirement accounts, including from IRAs and 401(k)s.

(Required minimum distributions from IRAs and retirement accounts were previously waived for 2020 as a COVID-19 relief measure.)

The penalty is waived for inherited accounts subject to a new rule in proposed regulations implementing the SECURE Act of 2019. Under that rule, effective for tax years after 2019, accounts inherited from a plan participant or IRA owner who died after the Required Beginning Date are generally required to make life expectancy distributions to designated individual beneficiaries for the first nine years after the year of death before distributing the balance of the account during the tenth year after the year of death.

Effective for years beginning on or after January 1, 2020, the Required Beginning Date is April 1 of the year following the year the participant/owner reached age 72. Roth IRA owners don’t have a Required Beginning Date. For 2021 and 2022, plan participants with a Roth account in an employer plan did have a Required Beginning Date.

“Eligible designated beneficiaries” who inherit the retirement account from a plan participant or IRA owner who died after the Required Beginning Date, including the surviving spouse, minor children (under age 21) of the participant/owner, disabled beneficiaries, beneficiaries who are chronically ill, or a beneficiary who is none of those and is not more than ten years younger than the participant/owner, were subject to the requirement to make life expectancy required minimum distributions starting the year after death before and after the SECURE Act of 2019, so the penalty isn’t waived for failing to make those distributions.

Non-designated beneficiaries, such as the estate of the deceased plan participant or IRA owner or a charity, who inherited the account from a plan participant or IRA owner who died after the Required Beginning Date, were required to take required minimum distributions based on the participant/owner’s remaining life expectancy starting the year after death before and after the SECURE Act of 2019, so the penalty isn’t waived for failing to make those distributions.

Certain trusts can qualify as designated beneficiaries and eligible designated beneficiaries. See a tax advisor who is familiar with the rules for details.

The penalty waiver also doesn’t apply to the required minimum distribution for the deceased account participant/owner’s year of death.

The penalty for failure to make a required minimum distribution is reported on Form 5329.

The IRS might waive the penalty when there was a reasonable cause for failing to make a distribution. With the confusion that a family goes through after a death, in most cases the penalty would be waived.

Effective for years beginning after December 29, 2022, SECURE 2.0 Act of 2022 includes a provision reducing the penalty for failing to make a Required Minimum Distribution from 50% to 25%, or to 10% when the failure to make a distribution is corrected in a timely manner. It seems the IRS won’t be as receptive to totally waive the penalty in the future.

Beneficiaries of IRAs and employer retirement plans (like 401(k)s), should review the required minimum distribution requirements with a tax advisor who knows the rules, and determine whether a not a penalty for failure to make a required minimum distribution applies for their situation. Some beneficiaries who paid a penalty can file an amended return for 2021 or 2022 to request a refund for the waiver under Notice 2022-53.

Tax and financial advice from the Silicon Valley expert.