“With a longer wait now to that RBD, pushing it out a couple of calendar years, there’s a bigger risk that the owner is going to die before that beginning date, and therefore the account is subject to the five-tear rule,” he said. “If there’s one thing you take out of this session today, it is review all the beneficiary designations on your clients’ retirement accounts. If they have a non-designated beneficiary, most likely an estate or will, you need to fix that. There’s no reason to have that as a beneficiary designation. They can always come up with something better than naming their estate.”

New Rules For IRA Beneficiaries
Under the new rules, there are no changes to the treatment of non-designated beneficiaries, but significant changes to some designated beneficiaries, he said.

“Here’s where the SECURE Act has really changed things,” Steffen said. “Now within the designated beneficiary category, there’s a new term we have to learn. There are certain beneficiaries that are going to the eligible to maintain the old stretch IRA rules, and they are conveniently called eligible designated beneficiaries. They are allowed to keep the old rules that we’ve always talked about.”

Eligible designated beneficiaries (EDBs) include spouses, minor children of the IRA owner, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the owner.

Everyone else is considered to be non-eligible designated beneficiaries (non-EDBs), including non-minor children of the IRA owner or any other primary beneficiary, minor grandchildren, EDBs who lose their EDB status, and any successor beneficiary, including someone who would otherwise be an EDB or a successor of a pre-2020 beneficiary.

“These non-EDBs are now subject to the 10-year rule. What the 10-year rule says is non-EDBs must withdraw the entire balance in the IRA within 10 years of the death of the owner,” he said. “And more specifically what they mean by that is Dec. 31 of the year that holds the 10th anniversary of the owners death.”

This applies to any account where the owner died after 2019, when the SECURE Act was passed. So if the owner died in 2019 or prior, the old rules apply, but if the owner died in 2020 or later, the new rules apply.

“Now this is where it gets interesting, because under what we thought was happening with the SECURE Act, the 10-year rule was pretty straightforward—you have to empty the account within 10 years. You can do whatever you want in years one to nine, but by the end of that 10th year you have to empty that account,” Steffen said. “About two months ago, the IRS came out with their proposed regulations, which is their interpretation of the tax code that Congress wrote. So here’s what we have now: If you have an IRA owner who died after 2019 and who left the IRA to a non-EDB, you have two different treatments.”

If the owner died before their RBD, that beneficiary is subject to the 10-year rule, where they can do whatever they want in terms of distributions in years one through nine, but they have to empty the account in year 10.

But if the owner died after their RBD, meaning they were taking distributions, the beneficiary has the 10-year rule but also has to take distributions in years one through nine, like they would have under the old stretch IRA rules, he said.

“Here’s the crazy part about this—the IRS says the presumption is this rule has always been in place. So in cases where the owner died in 2020, the beneficiary had to take a distribution in 2021 that they didn’t know about until March 2022,” Steffen explained. “So there’s this uncertainty. What happens for these owners who died in 2020 where the beneficiary had to take something out in 2021 under these rules? We don’t know the answer to that yet.”

Steffen said he expects more clarification later this summer. “If clients fall into this category, they may have had to take a distribution for last year and they might have to take one for this year, so stay tuned,” he said. “Prepare your clients. If they’ve got inherited accounts they may have to take a distribution this year, maybe even two to make up for last year’s if they missed it.”