The IRS has proposed regulations to clarlfy some of the vagueness surrounding SECURE Act changes to required minimum distributions (RMDs). Experts say the guidance adds new complexity to beneficiary rules—especially for nonspouses.
The legislation gave IRA owners the option of staying in their tax-deferred vehicles longer by increasing the required minimum distribution age from 70½ to 72.
However, there are also challenges for investors and their advisors, specifically the SECURE Act’s introduction of the 10-Year Rule. It mandates that most non-spouse beneficiaries are required to distribute the entirety of their inherited retirement account by the end of the tenth year after a decedent’s death, Jessica Baehr, Head of Group Retirement for Equitable, says.
CPAs and advisors assumed that during those 10 years beneficiaries would have leeway to distribute as much or as little of the inheritance as they desired, as long as all proceeds were distributed by the end of the tenth year, Baehr says.
The proposed new regulation (2022-02522.pdf (federalregister.gov) seeks to implement a more complex system. It creates two non-eligible designated beneficiary groups, each with their own set of post-death distribution rules based on whether or not the decedent had already reached age 72 at the time of his or her death, which would be their required beginning date for taking minimum distributions.
“These rules are far less advantageous for clients than the former rules which allowed beneficiaries to stretch out distributions over the lifetime of heirs, which is sometimes 70 or 80 years,” Joseph Darby, founder of Joseph Darby Law PC, a firm specializing in taxation based in Boston, says. “Congress and the IRS decided that it was too much of a tax advantage.”
Non-eligible designated beneficiaries who inherited from retirement account owners who died prior to their required beginning date would be subject to only the 10-Year Rule, the IRS said in the proposal. The only beneficiaries who are exempted are surviving spouses, dsabled, chronically ill or no more than ten years younger than the decedent, according to Holland & Knight.
Meanwhile, non-eligible designated beneficiaries who inherited assets from retirement account owners who died on or after their required beginning date for distributions, January 1, 2020, would be subject to both the 10-Year Rule and the IRS’s regular stretch distribution rule.
In other words, beneficiaries who inherit retirement accounts where the owner dies on or after their required beginning date would continue to have to comply not only with the stretch distribution rules in place before the SECURE Act was passed—which require that they take annual minimum distributions in each of the first nine years after death, but they would also be required to take the final distribution before the end of the tenth year after death.
According to the regulations, these rules “apply whether or not distributions have commenced. Accordingly, if an employee dies after the required beginning date, distributions to the employee’s beneficiary for calendar years after the calendar year in which the employee died must satisfy” both the 10-year and stretch rules.