The Internal Revenue Service is once again waiving the hefty penalties for taxpayers who haven’t taken their required minimum distributions on the traditional IRAs they inherited.

The agency will waive the penalty for distributions missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to required minimum payouts, according to a recent bulletin. Previously, the penalties were 50% of the amount that should have been withdrawn, but that changed under the SECURE Act 2.0, which reduced the penalties for missing required distributions to 25% and in some cases to 10%.

This is the fourth consecutive year the IRS has canceled penalties for nonspouse beneficiaries who didn’t take RMDs from inherited accounts. The agency previously granted relief on distribution penalties for IRAs inherited in 2020, 2021 and 2022. Spousal beneficiaries of an IRA or 401(k) have the option of taking an inherited account and managing it as if it were their own.

The agency's notice last month (2024-35) is a welcome reprieve after the original SECURE Act dramatically changed withdrawal rules in 2019. That law said beneficiaries could no longer “stretch” the distributions from inherited IRAs over their lifetimes. Instead, the law required nonspouse beneficiaries who inherited the accounts on or after January 1, 2020, to completely draw down the IRA within 10 years of the account owner’s death. The SECURE 2.0 Act said the beneficiary must begin taking distributions at age 73 in 2023, and the law eventually pushes the age back to 75.

“It’s important to make the distinction that it is the excise tax that is waived and not the required minimum distributions,” said Denise Appleby, author of the IRA Quick Reference Guide, in a recent Morningstar podcast.

And don’t forget that, penalties aside, the 10-year clock to draw down the entire balance of the inherited IRA balance is still ticking.

As Appleby said on the podcast, “When [the IRS] first published the guidance about this waiver, it was for 2021 and 2022. Then, later on, they said, ‘Let’s extend it for 2023.’ Now they have said, ‘Let’s extend it for 2024.’ So someone who inherited an IRA in 2020 still has the end of the 10-year period to take it. But if they took advantage of this provision and didn’t take it for 2021, 2022, 2023, 2024, they still only have six years to take it.”

When to take the required minimum distributions boils down to each taxpayer’s individual tax situation. “Should you take advantage of this and not take your RMDs for those years?” Appleby asked. “If you inherited in 2020, you will have six years over which you have to bunch up those distributions, which could mean larger distributions. That’s not a problem for everyone, which is why you want to talk to your tax advisor and say, ‘Does it make sense for me to work with that and not take the RMD for this year?’ Maybe this is your last year that you’re working and getting that big, fat paycheck and you retire next year, so it might make sense for you [to delay] because you’re going to have less other income coming in.”

The fact that this is a penalty waiver—and not a waiver of the required distribution itself—is important, she said. When Congress waives RMD requirements, it adds an additional year to take them. 

“If they had waived actual RMDs under this provision, let’s say they had waived it for 2024, then anyone who was subject to the 10-year rule would’ve gotten an additional year,” Appleby said. “Also, if they had waived RMDs and you had your money in an inherited 401(k) and you were rolling it over, then you could roll over the entire balance. But they didn’t waive RMDs. What that means is you still only have 10 years.”

Still Confusion
The SECURE Act still confuses people because when it was signed into law, the language was very clear and said if you are a designated beneficiary, you are subject to the 10-year rule. And the 10-year rule works like the old five-year rule for inherited IRAs. Under the old five-year rule, distributions were optional for the first four years. But you had to empty the account by the end of year five.

“It was reasonable to believe that distributions were optional in all cases under the 10-year rule. But then when they published the proposed RMD regulations in February 2022, the IRS said, ‘Not so fast. Don’t forget that the “at-least-as-rapidly rule” applies.’ And under the ‘at-least-as-rapidly rule,’ if you inherit an IRA from someone who was already taking RMDs, you can’t stop that train. You just got to hop on and continue taking RMDs … and you have 10 years to empty the account if you are just a regular designated beneficiary,” Appleby said.

The new decision has people asking if the IRS will likely again suspend the withdrawal penalty for inherited IRAs, this time to 2025.

Appleby said it is clear to her the IRS is doing the best it can to dampen the shock taxpayers felt after losing stretch IRAs.

“They don’t have the authority to waive the RMD, so they keep putting on that Band-Aid because they’re responsible for the excise tax,” she said. “So they waive that. One of the recommendations I make is if you want them to waive RMDs, contact your congressperson and say, ‘Pass a law like you did under the CARES Act of 2020. During the pandemic, you waived RMDs.’”

That year was proof that lawmakers listened, because no RMDs applied, she added.

“That’s what we want for this, because this 10-year rule is so confusing to everybody who is subject to it. Give them a break. Waive the RMDs so that we don’t have to have these convoluted explanations and so that they get an extension on the 10-year period. Call your congressperson. Tell him I sent you,” Appleby said.

The new IRS decision will not apply to your account if you have an inherited Roth IRA. Under the 10-year rule, these accounts are not subject to required minimum distributions in years one through nine, no matter when the original account holder died. If you don't need the money, you should leave the funds in your Roth IRA for as long as possible for as much of the 10-year period as you can.