Recent pandemic-relief laws and new IRS guidance have made preserving retirement accounts for inheritances trickier.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated the stretch IRA for non-eligible designated beneficiaries (eligible designated beneficiaries, or EDBs, generally include spouses and minor children of the decedent, among others). SECURE now mandates that money in the inherited account must be fully withdrawn with required minimum distributions (RMDs) by 10 years after the account owner’s death.

Over those 10 years, non-EDBs did not have to take required minimum distributions from the IRAs. The IRS, however, recently updated its Publication 590-B regarding distributions from IRAs, interpreting the 10-year rule “differently than expected,” said Elizabeth Witko of Drucker & Scaccetti in Scranton, Pa. Pub. 590-B includes language “indicating,” she added, that a non-EDB must take distributions in years one through nine after inheriting the IRA—potentially pushing those beneficiaries into a higher tax bracket. (The account still needs to be fully distributed by the end of the 10th year.)

The IRS wording “stunned practitioners,” said David Waddington, a CPA and partner at Friedman LLP in Toms River, N.J.

Affected beneficiaries will use new life expectancy tables to calculate RMDs from inherited accounts. These tables are effective beginning on Jan 1, 2022, said Robert N. Polans, a CPA at Drucker & Scaccetti in Philadelphia. “Generally, the updated tables will mean smaller RMDs in 2022,” he added.

SECURE does also allow individuals, no matter their age, to continue funding contributions, among other changes that could increase financial options, noted Robbin E. Caruso a CPA, partner and co-leader of the National Tax Controversy Department at Prager Metis in Cranbury, N.J. “My clients are often surprised when I advise them about the impact of the SECURE Act rules,” she said. “Most of them are aware that they can wait until age 72 to start taking distributions, but they didn’t know the impacts to their beneficiaries with the loss of the stretch-IRA planning.”

Inherited IRAs can be a big part of an estate and taxed hugely, added Robert Karon, Minneapolis-based managing director at CBIZ MHM. “These assets can be constantly growing during your lifetime and long after you’re gone."

IRAs inherited prior to 2020 can continue to function as stretch IRAs under the old rules, said Clark Kendall, president and CEO of Kendall Capital in Rockville, Md.

Changes from SECURE do allow IRA owners and beneficiaries to be “more intentional,” Kendall said. “Beneficiaries close to retiring might choose to forego taking RMDs for a few years and use the inherited IRA assets to fund the first few years of their retirement.

“Smooth out the taxable distributions from an inherited IRA so that the beneficiary doesn’t have spikes in annual income that kicks them into a higher marginal tax bracket,” he added.

“Many advisors would be reticent to recommend large distributions now at the expense of commensurate large tax bills. I would expect client resistance as well,” Waddington said, adding that commonsense techniques to pay down estates to reduce taxes include a Roth conversion.

Scrutinize beneficiary designations on all retirement plans to see what can be done to minimize effects of the rule change, adviisors saiid. “Once we understand the client’s long-term goals for these plans, then we look for other opportunities if their plan was set forth as a stretch IRA,” said Brent Lipschultz, partner in the National Tax Group and personal wealth advisor for international tax at EisnerAmper in New York. “Certain trusts used in IRA planning may need to be reviewed, such as conduit and accumulation trusts.”

SECURE does not eliminate the charitable IRA, he said, adding that this strategy allows those who’ve reached their RMD to roll over $100,000 to a qualified charity from their IRA; the distribution is not included in the AGI.

“Whatever you leave to charity, whether a donor-advised fund, a private family foundation or to public charities, these methods are estate and income tax-free,” Karon said.

Publications such as 590-B are also not official IRS guidance, Witko said. “It may be worthwhile to delay such 2021 required minimum distributions ... until more guidance comes out,” she said.