Back to Missives
George F. Bearup, J.D. Senior Legal Trust Advisor

November 9, 2022

SECURE Act Proposed Regulations

Take-Away: As we near the finalization of the IRS’ Proposed Regulations on the SECURE Act, it is helpful to recall some of the surprising ‘interpretations’ that the IRS has provided to that Act in its Regulations. Four important IRS ‘interpretations’ are summarized below. It is highly doubtful that the IRS will change its position on its interpretation of what the SECURE Act requires.

  1. Definition of Minor: Recall that the SECURE Act created 5 classes of eligible designated beneficiaries who are able to take annual RMDs from inherited retirement accounts using their Single Table Life Expectancy, other than for a surviving spouse. One of those classes is a minor child of the deceased retirement account owner. The question that arose after the SECURE Act was initially adopted was whether a minor is determined under state law, which varies from state to state, ranging from 18 to 21 years. The Proposed Regulations state that for purposes of determining whether a minor is an eligible designated beneficiary, the child will no longer be a minor, and thus no longer an eligible designated beneficiary, beginning on the child’s 21st Once the child is has reached age 21 years, he/she is subject to the SECURE Act’s 10-year distribution rule with regard to their inherited retirement account.
  1. Annual RMDs for Post-RBD Designated Beneficiaries: Perhaps the biggest surprise was this ‘interpretation’ from the IRS regarding annual RMDs for some, but not all, designated beneficiaries. The SECURE Act provides that a designated beneficiary who is not an eligible designated beneficiary is subject to the mandatory 10-year distribution rule, where the 10-year distribution rule is identical to the ‘old’ 5-year distribution rule for pre-2019 beneficiaries. The SECURE Act also provides that this 10-year distribution rule applies, regardless of whether the retirement account owner had started taking required minimum distributions (RMDs) at the time of their death. Most who read the SECURE Act concluded that this meant that regardless of the age at which the retirement account owner died, their designated beneficiary could choose whether (or not) to take RMDs for the first 9 years after the year in which the account owner died, but they must fully distribute the balance of the inherited retirement account by the end of the 10th The surprise is that the IRS in its Proposed Regulations concluded that if the retirement account owner dies on or after his or her required beginning date (RBD) of age 72, annual RMDs must be taken by the designated beneficiary.
  • Owner Dies Before RBD: If the retirement account owner dies prior to age 72, and thus he/she was not yet subject to taking RMDs, then the designated beneficiary of the inherited retirement account may choose whether to take distributions during the first 9 years that follow the year in which the retirement account owner dies, and the inherited retirement account must be fully distributed by the end of the 10th

Example: Adam dies during 2022 at the age of 72. Since Adam died before April 1 of the year that follows the year in which Adam reaches age 72, i.e. April 1, 2023, Adam died before his RBD. Adam names younger brother Ned as the designated beneficiary of his IRA. Ned is not disabled, not chronically ill, nor is he less than 10 years younger than Adam, i.e. Ned is not an eligible designated beneficiary. Rather, Ned is only a designated beneficiary, who is subject to the 10-year distribution rules. Thus, Ned may withdraw any amount, or nothing, from Adam’s IRA up until December 31, 2031, at which point Ned must then withdraw the entire balance of the inherited IRA by December 31, 2032. This same result would occur if Adam’s IRA was a Roth IRA, because Roth IRA owners are not subject to taking RMDs, and therefore Adam had no RMD with regard to his Roth IRA.

  • Owner Dies After RBD:  If the retirement account owner dies after attaining his or her required beginning date, i.e. age 72, the designated beneficiary must take annual RMDs over his or her life expectancy beginning by December 31 of the year that follows the year in which the retirement account owner died, and the inherited retirement account must be fully distributed no later than  the end of the 10th year, or the end of the designated beneficiary’s life expectancy, whichever date comes first.

Example: Adam dies during 2022 at age 73. Since Adam died on or after April 1 of the year that follows the year in which he attained age 72, Adam is treated as having died after his RBD. Adam’s beneficiary is his 60 year old brother Ned. Ned is not disabled, not chronically ill, nor is he less than 10 years younger than Adam. Therefore, Ned is not an eligible designated beneficiary. Ned must take annual distributions from Adam’s IRA over his single life expectancy, which is 26.2 years. Ned’s first withdrawal must occur prior to December 31, 2023. Ned must withdraw the entire balance of Adam’s IRA  by December 31, 2032.

  1. Option to Choose Pre-RBD Eligible Designated Beneficiaries: An eligible designated beneficiary who inherits a retirement account from an individual who has died prior to his/her RBD has the option to choose between the following: The eligible designated beneficiary possesses the option to either take distributions from the inherited retirement account: (i) for the 9 years that follow the year in which the retirement account owner dies, or  (ii) the life expectancy rule where distributions are taken over the single life expectancy of the eligible designated beneficiary. These distributions must begin by December 31 of the year that follows the year in which the retirement account owner died.  However, if the designated beneficiary is the surviving spouse of the deceased retirement account owner, hence he/she is an eligible designated beneficiary, the distributions to the surviving spouse must begin on the later of: (i) December 31 of the year that follows the year in which the retirement account owner died; or (ii) December 31 of the year in which the retirement account owner would have reached age 72.

A retirement plan may provide that either of these two options apply. If the plan defaults to the 10-year distribution rule, the eligible designated beneficiary may elect the life expectancy option by rolling over the inherited retirement account to a beneficiary-owned inherited IRA that provides for the life expectancy option. That rollover must be done as a direct rollover by December 31 of the year that follows the year in which the retirement account owner died.

  1. The ‘shorter of’ Period for Post-RBD Eligible Designated Beneficiaries: An eligible designated beneficiary who inherits a retirement account from an individual who died on or after their RBD must take annual RMDs beginning by December 31 of the year that follows the year in which the retirement account owner dies. This RMD is based on the longer of: (i) the life expectancy of the deceased retirement account owner; or (ii) the life expectancy of the beneficiary. Consequently, older beneficiaries may be penalized by requiring that the inherited retirement account must be fully distributed by December 31 of the year in which the beneficiary’s life expectancy would be equal to or less than one, even if the life expectancy of the deceased account owner is longer and thus is used to calculate the beneficiary’s RMD.

Example: Adam dies in 2022 at age 75, i.e. after his RMD. Adam’s life expectancy would be 14.8 years, as determined in 2022. Adam’s designated beneficiary is his sister, Nancy, who is age 80. Nancy’s life expectancy is 11.2 years, determined in 2022. Nancy is an eligible designated beneficiary since she is less than 10 years younger than Adam. Because Adam’s life expectancy is longer than Nancy’s, his life expectancy is used to calculate Nancy’s annual RMD. Even though Adam’s life expectancy is used to calculate Nancy’s RMDs, the inherited retirement account must still  be fully distributed in the year that Nancy’s life expectancy would have been less than or equal to one. Using the non-recalculated method of subtracting one from 11.2 for each subsequent year, Adam’s inherited retirement account must be fully distributed to Nancy by the 11th calendar year after the year of Adam’s death, when Nancy would reach age 91 and her life expectancy would be less than or equal to one.

Conclusion: It will be interesting so see how the IRS responds, if at all, to the comments it has received on these ‘interpretations’ of the SECURE Act when the Proposed Regulations become finalized.