The IRS last week issued final regulations on the Setting Every Community Up for Retirement Enhancement Act, which took effect in late 2019. The final regulations generally follow proposed regulations that might be issued in 2022.
Despite quite a few requests for changes, the IRS retained essentially the most controversial provision within the proposed regulations: its interpretation of the brand new 10-year rule for inherited IRAs and other retirement accounts.
The SECURE Act eliminated the stretch IRA for many beneficiaries of IRAs and other retirement accounts. Under the previous law, beneficiaries were required to take required minimum distributions annually. However, RMDs could often be stretched over a beneficiary’s life expectancy.
The Stretch IRA has been replaced by the 10-Year Rule. For IRAs inherited after 2019, most beneficiaries must fully money out the IRA inside 10 years of the inheritance.
This is where the IRS regulations turn into complicated and controversial.
The rules divide inherited IRAs into two groups.
The first group are IRAs whose original owners had not yet reached the minimum age for taking RMDs.
A beneficiary of such an IRA can withdraw it on any schedule, provided it’s fully paid off by the tip of the ten years. The beneficiary can withdraw a portion annually, wait until the tip of the ten years to withdraw all of it, withdraw all the IRA soon after the inheritance, or follow some other pattern.
The second group are IRAs whose original owners had reached the minimum age for RMDs.
In years one through nine after inheritance, beneficiaries must proceed taking RMDs on no less than the identical schedule that the deceased owner used. Essentially, the beneficiary takes an RMD annually based on the age the deceased owner would have been that 12 months. The entire IRA have to be withdrawn by the tip of 12 months 10.
Beneficiaries within the second group can fully withdraw the IRA at any time before 12 months 10, which might eliminate future annual RMDs.
The 10-year rule applies to each traditional and Roth accounts.
But the unique owners of Roth IRAs haven’t got to take RMDs, so their beneficiaries haven’t got to take RMDs in years one through nine. They just need to distribute all the Roth IRA by the tip of 12 months 10.
Because the requirement to take RMDs in years one through nine was previously only included in draft regulations and was controversial, the IRS has suspended this requirement lately, declaring that any penalties for failing to take these RMDs in 2021 through 2024 can be waived.
In the ultimate regulations, the IRS explained that the annual RMD requirement won’t be retroactive. Annual RMDs don’t have to start until 2025. However, the 10-year rule stays unchanged. Most retirement accounts inherited after 2019 have to be fully withdrawn inside 10 years of the inheritance.
In practice, the 10-year rule and annual RMD requirement matter to only just a few beneficiaries. Most beneficiaries distribute inherited IRAs relatively quickly after they take ownership of the accounts.
