Unclear IRS guidance regarding how long beneficiaries are required to take payouts from inherited IRAs continues to bedevil estate and retirement planning.
At the heart of the matter is the IRS’s new guidance, Publication 590-B, which seems to indicate that certain beneficiaries will no longer have 10 years to take distributions from inherited IRAs and instead will be required to take payouts the first year of their inheritance.
“Most practitioners are under the impression that under the SECURE Act that the designated beneficiary can wait until the 10th year following the year of death of the IRA owner to withdraw the decedent’s entire IRA account balance and avoid the IRS 50% penalty tax,” Seymour Goldberg, tax attorney and CPA at the Melville, N.Y. law firm of Goldberg & Goldberg, said in a blog this week.
However, the wording in the IRS guidance “seems to indicate that required minimum distributions must be made to the designated beneficiary for the first nine years following the year of death of the IRA owner. Further, that the decedent’s entire IRA account balance must be paid to the designated beneficiary by the 10th year,” Goldberg added.
Advisors and CPAs have no alternative but “to wait for the proposed regulations under the SECURE Act to come out and indicate whether the apparent nine-year timing issue ... is a real issue or not,” Goldberg added.
While the SECURE Act of 2019 stripped many inherited IRA beneficiaries of the stretch distribution option, it did add some clarity around payouts. For instance, it made clear that non-eligible beneficiaries such as adult children would have to empty their inherited IRAs within a 10-year period of time and that they would have discretion on how much they could take each year.
But Publication 590-B contradicts how advisors and CPAs have interpreted the IRA distribution requirements for non-eligible beneficiaries, including named non-spousal beneficiaries such as non-minor children and grandchildren.
For other designated beneficiaries, the IRS says in the new publication, “Use the life expectancy listed in the table next to the beneficiary’s age as of his or her birthday in the year following the year of the [IRA] owner’s death. Reduce the life expectancy by one for each year since the year following the [IRA] owner’s death. However, if you are a designated beneficiary who is not an eligible designated beneficiary, the entire account balance must be fully distributed within 10 years after the [IRA] owner’s death.
Further clouding the generally accepted 10-year distribution rule is a specific example the IRS included that seems to suggest that instead of waiting 10 years to begin taking RMDs, the beneficiary must begin to take them the first year of their inheritance.
The IRS example states, “Your father died in 2020. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2021, which is the year following your father's death. You use Table I and see that your life expectancy in 2021 is 31.4. If the IRA was worth $100,000 at the end of 2020, your required minimum distribution for 2021 would be $3,185 ($100,000 ÷ 31.4).”