IRS Removes Penalties on 2021 and 2022 RMDs

The IRS just released Notice 2022-53 dealing with not assessing penalties on taxpayers who inherited retirement plans or individual retirement accounts and elected not to take Required Minimum Distributions (RMDs) in 2021 or 2022 even though the Proposed Regulations released earlier this year indicated these taxpayers should take them.

These RMDs only applied if you inherited retirement assets from a person who was already taking RMDs and were subject to the ten-year rule. The SECURE Act imposed the ten-year rule, in which you have 10 years to fully take distributions out of the account. The ten-year period begins in the year after death of the retirement account owner. Certain beneficiaries such as spouses are not subject to these rules. Instead, they are allowed to take an annual distribution over their lifetime (in most cases) and no penalty relief is available for them since these rules really had not changed due to the SECURE Act.

If the owner was not required to take distributions, then you have up to the 10 years to take the distributions, but you do not have to take any in years 1-9. If the owner was subject to required distributions, then the Proposed Regulations required you to take a distribution every year and fully deplete in year 10.

Many commentators have complained about the Proposed Regulations and most taxpayers in 2021 assumed no RMDs was required and the regulations did not come out until 2022. Also, many advisors suggested these beneficiaries take none until later this year.

The good news is that the IRS did issue the notice in plenty of time to indicate you do not owe any related penalties for 2021 or 2022. If you have paid a penalty for either year, the IRS indicates you can file for a refund. They will not automatically issue a refund. Just know that if you file for a refund you will likely not see it until sometime in 2023 (that’s assuming you are that lucky).