What is the IRS thinking?
The SECURE ACT was enacted back in December of 2019
One of the sweeping changes that was part of the SECURE ACT was the way one who inherited a retirement account had to take distributions. Prior to the SECURE act, it was pretty straightforward. If you were a spouse of the decedent, you could roll the plan into your own IRA and if you were younger than 70 1/2, leave the money in the account and then start taking Required Minimum Distributions when you turned 70 1/2. You could also have left the money in your spouse’s IRA which was preferable tax wise if you were younger than age 59 ½ and needed to take distributions. This strategy avoided the 10% penalty for early withdrawal. After the SECURE ACT was passed, for spouses, things didn't change much other than you now had until 72 to start taking these required distributions.
Eligible designated beneficiaries were always in the drivers street. There are five groups that fit in this category. Surviving spouses, those that are disabled, folks that are terminally sick, people that are not more than 10 years younger than the deceased, and minor children.
There is proposed legislation that is making this even more complicated.
How? Well, they made it even more confusing by categorizing the designated beneficiaries into two groups. Eligible and non-eligible.
Designated beneficiaries and non-eligible designated beneficiaries. Living, breathing folks in the first category and non-living such as an estate or a trust in the second.
Under the Secure Act, if one was a non-eligible designated beneficiary (Namely, a non-spouse but a live person) they had 10 years to empty the IRA. No more required distributions each year but one could take some, none, or all of the money out as long as the account was empty in the 10th year after the date of death.
Under the proposed rules, they stepped it up in the world of making things even more confusing. They stated that distributions depended on whether or not the decedent died before their required beginning date (RBD) (72) or after. If one died before their RBD, then the non-eligible designated beneficiary needed to simply empty the account by that 10th year.
However, if one died on or after their RBD, the non-eligible designated beneficiary would be required to not only empty the account by that 10th year but also take required minimum distributions in years 1 through 9 just as they did before the SECURE ACT was passed. Then in that 10th year, take out whatever is left.
Sound crazy? Yup!
These regulations are still in the proposed stages, and we will hopefully have an answer well before the end of the year.
Why is this important? Well, if the regulations change to move away from the 10-year rule where one could leave an account they inherited dormant for 10 years and instead, go back to the annual required distribution rule, then those that inherited an IRA from a non-spouse in 2020 or 2021, would be required to make sure they took their distribution to steer clear of the 50% penalty. Now, we can't go back in time to 2020 (For those that have passed away in 2021, the distribution wouldn't need to be disbursed until 12/31/2022 so we still have some time) The IRS would need to make an allowance for those that passed away in 2020 and simply require that amount to come out by the end of 2022.
We are monitoring this closely. If you inherited an IRA from a non-spouse in 2020 or 2021, and are a current client, you will be hearing from us as soon as we have something concrete.
For those that are in this situation and not a client of FPS, feel free to reach out to me and I'll add you to my list.
Feel free to reach out to me if you have any questions. I’m here to help.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Rick@PlanWithFPS.com
617-630-4978
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.