IRS' Secure Act Guidance on RMDs Has a Surprise Twist

What You Need to Know

Under the new guidance, a beneficiary subject to the 10-year rule for inherited IRAs can’t simply wait until year 10 to empty the account.
It also clarifies some rules around beneficiaries not subject to the 10-year rule.
Comments on the proposed regulations are due May 25, and the IRS likely will receive comments that could result in changes.

The Secure Act upended the rules governing inherited retirement accounts by limiting the value of the stretch IRA to a 10-year period for most account beneficiaries. Now, the IRS has released long-awaited proposed regulations interpreting the parameters of the law.

While most of the required minimum distribution rules remain the same, the proposed regulations answer some important questions left lingering after the Secure Act became effective. They also contained a surprise twist that sharply limits the ability of most non-spousal beneficiaries to stretch the tax deferral of the IRA post-death.

Clients who have recently inherited accounts should take note of the changes — and stay tuned for final regulations, which could be released later this year.

 Secure Act’s Inherited IRA Changes

Under prior law, non-spouse beneficiaries could take distributions from an inherited retirement account either over a five-year period or using the beneficiary’s life expectancy — to “stretch” the tax deferral benefits over the lifetime of the next generation. The Secure Act limited the value of the stretch for most taxpayers who do not qualify as “eligible designated beneficiaries.”

Post-Secure Act, most non-spouse account beneficiaries will be required to take distributions over a 10-year period. 

Eligible designated beneficiaries who are not required to use the “10-year rule” for distributions (so that the pre-Secure Act rules apply) include surviving spouses, disabled beneficiaries, chronically ill beneficiaries, the account owner’s children who have not reached “the age of majority” and individuals who are not more than 10 years younger than the original account owner.

The rules apply to all defined contribution plans, including IRAs, 401(k)s and 403(b) plans.

Proposed Regs Limit the Value of the 10-Year Stretch

In a surprise move, the regulations require most designated beneficiaries to take annual RMDs within the 10-year distribution period if the original account owner died on or after the required beginning date. In other words, the beneficiary can’t simply wait until year 10 to empty the entire account. Of course, the new rule would mean that clients would generate added tax liability in each year of the 10-year period — rather than waiting to pay the entire tax in year 10.

While the Secure Act is silent with respect to whether annual distributions are required, many commentators have already said that the proposed regulations contradict the statute. The IRS, however, has yet to release guidance for clients who inherited accounts after the Secure Act’s effective date and before the regulations were issued. In other words, they don’t address whether a client may be required to take a retroactive RMD for 2021.