The proposed regulations would also clarify application of the change of the RMD starting age for surviving spouse beneficiaries.
The IRS has proposed that surviving spouses remaining as a beneficiary of accounts inherited from decedents born on or after July 1, 1949, who would have turned 70½ on or after January 1, 2020, had they lived, will not be required to take RMDs until the year the decedent would have turned 72.
If the surviving spouse beneficiary dies before the year in which the original decedent would have turned 72, the surviving spouse’s beneficiaries will be treated as inheriting directly from the original retirement account owner, according to the proposal.
The IRS also proposed that beneficiaries eligible for the stretch rule can opt out of it and into a 10-year distribution, but custodians have to allow it and can limit options. In fact, the proposed regulations state that a plan need not make both options available at all. Rather, the plan IRA can simply require beneficiaries eligible for the stretch to use the 10-year rule or the stretch rule to determine their distributions.
The new IRS proposals also clarify that minors can use stretch RMD rules until their 21st birthday, at which point they will be subject to the 10-year rule and potential continued RMDs.
“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,” says Darby. “Congress and the IRS decided that it was too much of a tax advantage.”
The proposed regulations “provide important clarifications on the types of eligible designated beneficiaries, as well as how and when the new 10-year rule for taking distributions applies to various types of beneficiaries,” Baehr says.