RTS #009 – Do your job! No matter what the IRS says

You may have seen the recent IRS notice 2023-54 that kicked the can AGAIN on required minimum distributions for inherited IRAs. If not, the short version is similar to 2020-2022; the IRS has waived any penalties for not taking RMDs on inherited IRAs for 2023. Too many people are going to take this as an excuse to wait an entire year to make a plan.

That is not delivering value to your clients.

Tax planning is all about understanding the choices available to you and proactively making decisions based on your (or your clients’) specific situation. For some, this could mean evenly taking distributions throughout the 10 years so that the hit doesn’t come all at once (which means that delay in RMDs being enforced is irrelevant). Maybe in year 8, after receiving the inherited IRA, the taxpayer is going to retire and have a low-income year, and it will make more sense to take most, if not all, of the distributions in that one year.

It is, of course, possible that taking only the RMDs and then distributing the remainder in year 10 is the best course of action for some taxpayers, but that needs to be an intentional choice!

This doesn’t require fancy software or an advanced degree in taxation. Anyone can pull out a pad of paper, write the years 1-10 and the top and start listing out expected life events. No, this isn’t going to create the highest level of precision, but it’s miles ahead of simply letting taxes happen to you.

This most recent IRS notice DID NOT indicate any changes to how the rules will be ultimately enforced (now starting in 2024). So we are expecting that beginning with 2024, whether or not an RMD is necessary will be based on the age of the decedent, and the amount of the RMD will be based on the age of the beneficiary. You absolutely need a system for making sure clients comply with the RMD requirements, but that is the bare minimum. Delivering massive value on tax planning means helping them make a proactive plan for how they will distribute the funds throughout their 10-year window (which could include QCDs).

What can you do about it?

Have a process for helping your clients plan for inherited IRAs. Writing the years 1-10 on a piece of paper (or maybe on an Excel sheet) is not facetious; it can be that simple. The goal is to understand their expected-based line so you can fit in the distributions where they will have the least negative impact on their overall tax situation (don’t forget about IRMAA and other shadow taxes!)

It’s also important to set the expectation with your clients that inheriting an IRA is something that can go very wrong if not handled correctly and that it is absolutely something you want to be involved in if it ever comes up.

Happy Tax Planning!

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The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.