Thursday, April 29, 2021

Inherited IRA Beneficiaries May Be Required To Take RMD’s

The SECURE Act became law on January 1, 2020 and made several changes to the rules for retirement accounts. One provision is that non-spouse beneficiaries of IRAs, with a few exceptions, must deplete the account within 10 years of the original owner’s death. This applies to all deaths after January 1, 2020. With this requirement, the SECURE Act put an end to the IRA Trust, which allowed IRA beneficiaries to stretch the Required Minimum Distributions (RMDs) over beneficiary’s  entire lifetime. Stretching was limited to a child and/or a grandchild or a qualifying trust benefitting a child and or a grandchild.

Many legal experts who analyzed the SECURE Act assumed the new 10-year rule would work like the existing 5-year rule for IRAs whose owners died prior to 72 and that had no designated beneficiary: although all funds had to be depleted within that time frame, no annual RMDs were required. The publication of IRS 590-B on March 21, 2021  (see pages 11-12), suggests the assumption was wrong and that the Internal Revenue Service requires RMDs.

590-B appears to suggest that not only would non-spouse beneficiaries of IRAs have to empty the entire account within ten years, but they also might  be required to take annual required minimum distributions in years 1-9. Those withdrawals would be based on the beneficiary’s own age and life expectancy. 

The tax implications are significant. Beneficiaries of traditional IRAs would have to pay taxes on their withdrawals, based on their tax bracket. Beneficiaries of Roth IRAs would lose the opportunity for the entire amount to grow tax-free before withdrawing it all at the end of the ten-year period.  This, of course, is the federal government's intention; the SECURE Act removes the tax benefits of stretch IRAs and ensures the government a meaningful opportunity to collect taxes as soon as possible.

The IRS rule has not been finalized, and is now open for public comment. Non-spouse IRA beneficiaries should be aware that depending on what happens, they may have to take a withdrawal this year. 

RMD's for 2020 were waived, by the way, due to COVID-19.

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