IRS Proposed Regs Change RMD Requirements for Some Inherited IRAs and Qualified Plans

Posted on Mon, May 23, 2022 ©2021 Drucker & Scaccetti

ds-instagram-post(is-becoming)Earlier this year, we wrote a blog titled “Considerations When Inheriting an IRA.” This blog discussed modifications made by the SECURE Act and how these rules changed from the pre-SECURE Act. Unfortunately, the IRS released proposed regulations on February 23, 2022, that added more complexity to the rules governing required minimum distributions (RMDs) on most inherited IRAs including SEP Plans and SIMPLE Plans, as well as some qualified plan distributions. In today’s blog, we’ll review how these proposed changes may impact you.


Before we dive into some specifics of these proposed regulations, we should note the proposed regulations are effective as of January 1, 2022, and specify that taxpayers were to calculate their 2021 RMDs on inherited IRAs by applying the existing regulations together with a reasonable, good faith interpretation of the SECURE Act (see our part I and part II blogs on the SECURE Act). For those beneficiaries inheriting certain IRA accounts and qualified plan accounts for which the proposed regulations would have required a 2021 RMD, it may be best to wait until there is more guidance following the end of the proposed regulation comment period on May 25, 2022 and wait for further IRS guidance or final regulations before taking any remedial action.


Major points from the SECURE Act:

  • When an account owner passes away and has an IRA or qualified plan account, beneficiaries of the account who are NOT an eligible designated beneficiary (“EDB”) lose the stretch IRA option and must distribute all the inherited funds by the end of the 10-year term following the date of death of the original owner. EDBs include surviving spouses, children of the account owner under age 21, chronically ill or disabled individuals, or anyone who is not more than 10 years younger than the account holder.
  • The required beginning date (“RBD”) was changed from April 1 following the year the account owner turns 70 ½ to the April 1 following the year the account owner turns age 72.

What the Proposed Regulations changed:

The original interpretation of the SECURE Act by most professionals, and by some at the IRS, was that there were no “annual” minimum distribution requirements (for any type of inherited IRA) except that the inherited IRA had to be fully distributed by the end of the 10th year following the death of the account owner. However, the Proposed Regulations are clear that, generally, this is no longer the case. The RBD provisions, which most tax professionals’ thought had become less important after the SECURE Act, are now relevant again.


The RBD is the date before which distributions must start. The SECURE Act created two sets of RBDs on IRA accounts. For individuals born before July 1, 1949, there is no change to their RBD. It remains on April 1 of the year following the year they turned 70 ½. However, for individuals born on or after July 1, 1949, the RBD became April 1 following the year they turned age 72. For the year of the RBD, an account owner must take two distributions unless they elected to take their first distribution by January 1 of the RBD year.


Under the proposed regulations, if the death of the account owner occurred before the RBD, then there are still NO annual RMD requirements alongside the 10-year rule. However, if the death of the original owner occurred on or after the account owner’s RBD, then annual RMDs in years 1-9 are based upon calculations under the stretch IRA rules by utilizing the IRS Uniform Lifetime Table and based on the oldest beneficiary’s age. In addition, the full balance of the inherited IRA must be withdrawn by the end of the 10-year period after the date of death, for account owners who died after the effective date of the proposed regulations.


For account owners who died after December 31, 2019, and before January 1, 2022, there is still a lack of clarity on which rules apply and when an RMD may have been required.


A key point regarding inherited ROTH IRAs is beneficiaries of these accounts (except certain spouses) will have NO annual RMD requirements but will still be required to empty the account no later than December 31st of the 10th year following the death of the account owner. The reason? ROTH IRAs have no lifetime RMDs, so they have no RBD and therefore, are not burdened with an annual distribution requirement. ROTH IRA owners are always deemed to have died before their RBD. Of course, they will still need to fully withdraw the account balance by the last day of the 10-year period following the account owner’s death.


The RMD rules are more complicated for Qualified Plans such as 401(k)s and other company plans except SEP and SIMPLE plans, which are considered IRAs. Such Qualified plans may permit plan participants still working beyond age 72 to delay their RBD until April 1 following the retirement year. The RMD is not delayed, however, for owners of greater than 5% of the employer sponsoring the plan. Where the ownership percentage in the employer sponsor varies above and below 5%, the percentage is determined in the plan year ending in the calendar year that the employee turns age 72. It is critical to look at the plan document to determine whether the specific qualified plan allows such delays under what is often referred to as the “still working exception.”


Next Steps:

If you inherited an IRA after December 31, 2019, first determine if the original account owner died after his/her RBD. If they died after their RBD and there is a named designated beneficiary, consult your D&S advisor for assistance in determining the RMD for the first year after the death of the account owner and for assistance in determining the type of designated beneficiary (i.e., an EDB or non-EDB).


If the designated beneficiary is a trust, the RMD rules get further complicated, and we recommend seeking professional advice to ensure the proper retirement account distributions are taken and the trust properly distributes these distributions to their beneficiary.


Unfortunately, comments on these proposed regulations are not due until May 25, 2022. Comments could lead to further changes in the regulations when finalized. As a result, the IRS will hopefully provide relief regarding how the law should have been interpreted for tax years ending after December 31, 2019, and before January 1, 2022. For now, we’ll continue to provide updates on this situation as announced by the IRS.

Topics: Inherited IRA, Required Minimum Distributions, SECURE act

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