Two tax and retirement specialists say a recent IRS publication has thrown IRA inheritance planning into chaos, but that advisors shouldn’t make changes just yet.
Until the release of IRS Publication 590-B (Pub 590-B), retirement and tax experts told advisors that 2019’s SECURE Act required that the entire balance of an inherited IRA be withdrawn by Dec. 31 of the 10th year following the original account owner’s death, but that no annual required minimum distributions (RMDs) would be necessary, said Ed Slott, founder of Ed Slott and Co. and professor of practice at the American College of Financial Services, and Robert Keebler, founder of Green Bay, Wis.-based Keebler & Associates, a tax advisory and CPA firm in a webcast.
However, an example in Pub 590-B illustrated that RMDs were to be taken from inherited IRAs in years one to nine after the death of the original account owner, contradicting the assumptions of experts.
Both Keebler and Slott believe that the illustration was a mistake and that annual distributions will not be required by IRAs subject to the 10-year rule.
“We think the example on page 12 of Pub 590-B is wrong,” said Keebler. “The publication is internally inconsistent with itself. The IRS says two totally opposite things on the same page within 300 words of each other.”
The 10-year rule was introduced by the SECURE Act to replace the “Stretch IRA.” Before the 2019 legislation, owners of inherited IRAs could recalculate the required distributions from the account using actuarial tables based on their own life expectancies, meaning a 30-year-old inheriting a large IRA from a parent or grandparent could have nearly 50 years in which to take distributions, lowering the amount of each annual distribution and the potential tax impacts of a sudden increase in income.
The SECURE Act replaced the stretch IRA for certain designated beneficiaries. Today, only spouses, minor children, the disabled, the chronically ill and beneficiaries within 10 years of age of the original account owner are exempted from the 10-year rule. Minor children are subjected to a modified 10-year rule—their 10-year clock to distribute all of the funds in the IRA begins at their age of majority, which is 18 for most Americans.
Otherwise, any designated beneficiary is required to withdraw IRA assets in accordance with the 10-year rule. The rule applies to see-through or conduit trusts as well, reducing their utility as estate planning tools, said Keebler.
When the SECURE Act was passed, experts assumed that it would adopt the same guidelines as the IRS’s already existing five-year rule for non-designated beneficiaries, which requires that all assets within an IRA be distributed by Dec. 31 of the fifth year after the death of the original account owner but does not impose requirements for annual distributions. If IRS Pub 590-B ends up being confirmed by the agency, the new 10-year rule would be at odds with the five-year rule.
Not only that, but if the example is upheld, then advisors would need to plan for their clients to take distributions from inherited IRAs this year, noted Slott.
Slott argued that advisors should not make any quick actions and should not have clients take an RMD from an inherited IRA based on Pub 590-B’s interpretation of the 10-year rule until the IRS has clarified its position.
“I would not have anybody take an RMD this year based on this publication now,” said Slott. “If anyone takes an RMD when they don’t have to, they can’t put it back in the account—so don’t do anything due to 590-B. Hopefully this will be corrected.”