We have a customer who is a designated beneficiary (but not an “eligible designated beneficiary”) of an inherited IRA. The IRA owner was the customer’s father, who died in 2020 after taking his required minimum distribution (RMD) for 2020. Our understanding was that under the 2021 IRA rules, our customer had ten years to empty the inherited IRA — either by taking annual distributions or a lump sum before the ten-year deadline. However, we recently viewed a webinar indicating that when an IRA owner dies in 2020 (or later) after reaching their required beginning date for taking RMDs, their designated beneficiary must take annual distributions and cannot wait to take a lump sum. Will our customer be penalized for not taking an annual distribution in 2021, and must they begin taking annual distributions in 2022?

No, we do not believe your customer will be penalized for not taking a distribution in 2021 or be required to begin taking annual distributions in 2022. We do not believe that the IRS’s IRA rules require designated beneficiaries to take annual distributions from inherited IRAs.

IRS Publication 509-B for use in preparing 2021 returns (last revised on April 29, 2022) is the most current IRS guidance on taking distributions from IRAs. This publication provides that distributions to a designated beneficiary who is not an “eligible designated beneficiary” (such as the IRA owner’s surviving spouse or minor child) must be completed within ten years of the IRA owner’s death according to the “ten-year” rule.

Under the ten-year rule, a designated beneficiary must withdraw the entire balance of the IRA by December 31 of the year containing the tenth anniversary of the IRA owner’s death, which in this case would be 2030. The guidance also provides that the “beneficiary is allowed, but not required, to take distributions prior to that date.” Further, this rule applies to “a designed beneficiary who is not an eligible designated beneficiary, regardless of whether the owner died before reaching his or her required beginning date.”

The IRS guidance also provides that “if the owner died on or after his . . . required beginning date . . . and you are an eligible designated beneficiary, you must base your required minimum distributions for years after the year of the owner's death on the longer of . . . [y]our single life expectancy . . . or [t]he owner’s life expectancy.” However, since your customer is not an eligible designated beneficiary, we do not believe this provision applies to them — and the IRS guidance also states that eligible designated beneficiaries may elect to take distributions using the ten-year rule, as an alternative to the life expectancy rules.

For resources related to our guidance, please see:

About Publication 590-B, Distributions from IRAs (“Recent Developments, Corrections to the 2021 Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) — 29-APR-2022”)

IRS Publication 590-B (2021), Distributions from IRAs — Designated beneficiary who is not an eligible designated beneficiary (“Distributions to a designated beneficiary who is not an eligible designated beneficiary must be completed within 10 years of the death of the owner. See 10-year rule, later.”)

IRS Publication 590-B (2021), Distributions from IRAs — Eligible designated beneficiaries (“An IRA beneficiary is an eligible designated beneficiary if the beneficiary is the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner.”)

IRS Publication 590-B (2021), Distributions from IRAs — 10-year rule (“The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December 31, 2031. The beneficiary is allowed, but not required, to take distributions prior to that date.

The 10-year rule applies if (1) the beneficiary is an eligible designated beneficiary who elects
the 10-year rule, if the owner died before reaching his or her required beginning date; or (2)
the beneficiary is a designated beneficiary who is not an eligible designated beneficiary,
regardless of whether the owner died before reaching his or her required beginning
date.”)

IRS Publication 590-B (2021), Distributions from IRAs — Owner Died on or After Required Beginning Date (“If the owner died on or after his or her required beginning date (defined earlier) and you are an eligible designated beneficiary, you must base your required minimum distributions for years after the year of the owner’s death on the longer of:

Your single life expectancy shown in Table I in Appendix B, as determined under Beneficiary an individual, later; or

The owner’s life expectancy as determined under Death on or after required beginning date under Beneficiary is not an individual, later.”)

IRS Publication 590-B (2021), Distributions from IRAs — Individual designated beneficiaries (“The terms of most IRAs require individual designated beneficiaries, who are eligible designated beneficiaries, to take required minimum distributions using the life expectancy rules (explained later) unless such beneficiaries elect to take distributions using the 5-year rule or the 10-year rule, whichever rule applies. . . . If the individual designated beneficiary is not an eligible designated beneficiary, the beneficiary is required to fully distribute the IRA by the 10th anniversary of the owner’s death under the 10-year rule.”)