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IRS Proposes Changes to the New 10-Year Payout Rule on Inherited IRAs

19 October 2022

Last time, we talked about the ways CPAs/financial planners are working with qualified retirement account owners to mitigate the effects of the SECURE Act’s changes to the distribution rules for inherited IRAs and other qualified retirement accounts.

Today, we are going to talk further about inherited retirement accounts, in light of the IRS’ proposed changes to the SECURE Act’s alterations to those distribution rules.

To recap, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), signed into law in December of 2019 and effective as of January 1, 2020, required most beneficiaries of inherited retirement accounts whose original owner passed away after December 31, 2019, to withdraw the entire inherited balance within 10 years of the original account owner’s death. Previously, any beneficiary of such an account could stretch required minimum distributions over their lifetimes, a prerogative the SECURE Act limits to:

  • The deceased account owner’s spouse.
  • A disabled beneficiary.
  • A chronically ill beneficiary.
  • A beneficiary not more than 10 years younger than the deceased account owner.
  • A minor beneficiary who is the child of the deceased account owner (the 10-year distribution rule will only become effective when the beneficiary reaches the age of majority).

The SECURE Act’s 10-year distribution mandate eliminated required minimum distributions (RMDs) for those beneficiaries who were now required to fully deplete the IRA in a 10-year window.

Those beneficiaries who are eligible to take distributions over their lifetimes can also elect to be bound by the 10-year rule.

However, as Congress considers further changes to the rules in the Securing a Strong Retirement Act (known as SECURE 2.0), a version of which passed in the U.S. House of Representatives in March of 2022, the IRS does what it does most and best – meddles.

The IRS proposes to require beneficiaries who don’t qualify for one of the exceptions (see above) to the 10-year distribution rule, or who elect the 10-year rule, to take RMDs themselves during each of the first nine years after inheriting the IRA, as well as making sure it is fully distributed within the 10-year period after death, if the original account owner had begun taking RMDs.

This could potentially result in hefty tax liabilities for those beneficiaries who, relying on the SECURE Act and the IRS’ own prior guidance, did not take an RMD in 2021 (RMDs were waived for 2020 due to the COVID pandemic, but this waiver was not extended). We would expect that the IRS would, if the new proposed regulations are approved this year, waive any tax penalty for 2021.

Other potential changes in SECURE 2.0 which could impact a significant number of taxpayers are:

  • Delaying RMDs. The original SECURE Act increased the age at which workers are required to start making withdrawals from their retirement accounts from 70 to 72. SECURE 2.0 would increase it once again: To 73 by 2022, to 74 by 2029 and finally to 75 by 2032. The point of RMDs is to give the U.S. Treasury the chance to start collecting tax revenue from tax-deferred savings, and keep them from becoming an estate planning device. Many Americans happily take their RMDs to cover living expenses, and the extra three years would primarily give wealthy retirees who don’t rely on RMDs for income more time to avoid tax liabilities.
  • Expansion Of Catch-Up Contributions. Increasing the annual catch-up amount to $10,000 for participants ages 62 through 64 beginning in 2023. This higher limit would be indexed for inflation for future years.

Since 2022 is drawing to a close, some beneficiaries who have inherited IRAs may want to take an RMD this year just as a precaution. Be assured we will monitor this volatile topic to provide further information as it emerges.

There is nothing like the IRS waiting until the last moment possible to propose changes.

If you are concerned about the impact of the SECURE Act, the potential SECURE 2.0 Act, and/or the new proposed IRS regulations could affect you, your loved ones, and your retirement/estate planning, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

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