Debate: Will 2023 RMD Relief Come Back to Haunt IRA Beneficiaries?

Bloink: We all know that not every eligible taxpayer will benefit from every piece of IRS relief — yet many will choose the benefit that is the most immediate. The IRS waived RMDs from inherited accounts for three years without a corresponding extension of the 10-year distribution period. Many taxpayers aren’t paying attention to that fact. Because the 10-year period was not extended, taxpayers may actually increase their overall tax liability by “bunching” their distribution into a seven-year period — especially those taxpayers who inherited accounts in 2020.

Byrnes: The about-face by the IRS’ proposed regulations threw a wrench in planning for many taxpayers who were just adjusting to the new 10-year rule. It’s entirely possible that the IRS may choose to extend the 10-year payment window for taxpayers who inherited accounts in 2020, 2021 and 2022. Also, this relief gives clients the flexibility to choose whether they will benefit from taking a smaller RMD now or a larger RMD in the future.

Bloink: Unless the IRS plans to change course on its annual distribution requirement, this relief could do more harm than good. For example, taxpayers forced into larger distributions for the remaining years could be bumped into higher tax brackets — which can affect their eligibility for government subsidies, tax credits and deductions — and could even increase the cost of their Medicare premiums.

Byrnes: The IRS regularly grants transition relief when a new standard is implemented. It’s not surprising that the IRS would grant this transition relief now, especially given the widespread impact that the new 10-year rule has on IRA beneficiaries. Taxpayers now have the option of delaying RMDs, so they can evaluate their unique financial situation and determine the best course of action based on that situation.

Bloink: The fact is, not every beneficiary of an inherited IRA understands the distribution rules governing these accounts. Tax professionals understand the Secure Act rules — but not every beneficiary consults a tax professional when making their decisions regarding RMDs. Without robust advice and guidance, continuing to provide RMD relief without a corresponding extension of the 10-year payout period is going to do more harm than good — especially for lower-income taxpayers.

Images: Adobe Stock

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