The IRS has proposed regulations to clarify some of the vagueness in the SECURE Act’s changes to required minimum distributions from retirement plans. Experts say the guidance adds new complexity to beneficiary rules—especially for those beneficiaries who aren’t spouses of the retirement plan owners.
The SECURE Act gave IRA owners the option of staying in their tax-deferred vehicles longer by increasing the required minimum distribution age from 70½ to 72.
But the act also gave investors and their advisors new challenges, specifically with the introduction of the “10-year rule.” This mandates that most non-spouse beneficiaries are required to distribute the entirety of their inherited retirement account by the end of the 10th year after the owner dies, says Jessica Baehr, head of group retirement for the insurance and financial services company Equitable. This was the end of what was commonly referred to as the “stretch IRA.”
Some beneficiaries could still get the tax benefits of stretching the IRA distributions, however: surviving spouses, disabled or chronically ill people, the minor children of the plan participants, or a beneficiary who was not more than 10 years younger than the beneficiary. But CPAs and advisors assumed that other beneficiaries falling outside these exempted groups would still have leeway to distribute as much or as little of their inheritances as they wanted, as long as all the proceeds were distributed by the end of the decade.
Now the IRS, in its efforts to iron out wrinkles, has come up with a new proposal that would create a more complex system.
For one thing, among those who are no longer eligible for the stretch IRA, the proposal creates two groups, each with its own set of distribution rules that depend on whether the plan participants leaving the IRA behind had already reached age 72 when they died.
If the IRA owner died before age 72, the beneficiaries would be subject only to the 10-year rule, the IRS said in the proposal. But if the owners died on or after their required beginning date for distributions at age 72, the beneficiaries would be subject to both the 10-year rule and the IRS’s regular stretch distribution rule (as of January 1, 2020).
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 the owner’s death, but they would also be required to take the final distribution before the end of the 10 years after the owner’s 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 years after the calendar year in which the employee died must satisfy “both the 10-year and stretch rules."
Joseph Darby, founder of Joseph Darby Law PC, a firm specializing in taxation based in Boston, just worked with an estate where the decedent died in 2019, so the beneficiary is able to stretch out required distributions under pre-SECURE Act rules. “I did the actuarial distribution plan for a 10-year-old who inherited large amounts of retirement assets, which we’ll be able to distribute over 73 years,” Darby says. “But in my experience, a lot of people who inherit now are in their 50s or 60s, which are often their peak earning years, the worst possible years from a tax planning perspective. This proposal will maximize their taxes further.”