Shortly after this blog was published on April 29, 2021, we received “unofficial word” from several sources including the AICPA and NAIFA that the IRS intends to correct their confusing guidance in Publication 590-B on Stretch IRA’s and the SECURE Act. We have been informed that the recent IRS Publication update did not reflect the views of IRS officials drafting new regulations or some Congressional Committee staff members who assisted in the writing of the SECURE Act. As more information becomes available regarding this development, we will provide an update.
Are you someone that inherited an IRA post January 1, 2020, and are a beneficiary other than an Eligible Designated Beneficiary? If so, you have probably heard that you had 10 years to withdraw funds from that inherited IRA under the new “10-Year Rule,” which originated in the SECURE Act of December 2019. You may have expected that IRA investment could continue to be completely deferred from taxation until you either needed some or all of the funds; or until the 10th year following the death of the original account holder, when you would have to withdraw any remaining IRA balances. Well, if that was your expectation, you had plenty of company including most tax advisors and students of the SECURE Act with one exception: The IRS.
Before we go any further, we need to explain that an Eligible Designated Beneficiary (EDB) is a specific carefully defined group that includes a spouse, disabled or chronically ill individual, minor child of the decedent, or individual not more than 10 years younger than the decedent. An EDB is not subject to this new 10-year limited stretch and was a category of beneficiary created by the SECURE Act. For those beneficiaries who do not fall into the EDB definition, the IRS now believes you must take an annual Required Minimum Distribution (RMD) in each of those ten years and that any remaining balance will need to be withdrawn by the end of the tenth year following the year of death.
People do not need to be concerned about having missed an RMD in 2020 since 2020 RMDs were not required because of provisions in the CARES Act.
The expectation until now was the 10-year rule would function in the same way as the old five-year rule, with no RMDs being required and the account needing to be 100% withdrawn by December 31 of the year containing the 10th anniversary of the owner's death.
In late March 2021, however, the IRS interpreted the 10-year rule much differently than expected. This updated Publication 590-B gives an example of how the RMD should be calculated annually and after 10 years, the remainder of the account must be fully distributed by the end of the 10th year.
Publications such as 590-B are not “official IRS guidance.” Even with this insight into the IRS’s viewpoint, if you inherited a retirement account and it appears you are now required to take minimum distributions under the 10-year rule, you may want to delay making a withdrawal until late 2021 when something more definitive comes out on this subject. This will probably be a topic for further discussion and analysis as the year progresses amongst industry professionals, the IRS, and Congress. Stay tuned!