Post-SECURE Act Required Minimum Distribution Rules

Take-Away: While a recent IRS Publication on required minimum distribution (RMD) rules created major confusion, it also answered several lingering questions created by the SECURE Act. The IRS has informally admitted that for normal distributions to designated beneficaries, i.e. individuals, there is no requirement for an individual to take any distributions from an inherited retirement account during the first 10 years after the retirement account is inherited.

Background: The IRS caused quite a stir a few weeks back with its IRS Publication 590-B, in which it implied with a couple of its examples that a designated beneficiary would be required to begin taking RMD’s shortly after the account owner’s death, when most interpreted the SECURE Act as giving the designated beneficiary the ability to withhold taking any distributions from the inherited retirement account until December 31 of the tenth year after the decedent’s death. Some interpreted these examples as requiring something of a ‘combo life expectancy-10-year’ distribution requirement. That is not the case.

Mistake: An IRS spokesperson recently admitted that the examples referred to were ‘incorrect’ and that under a revised Publication 590-B (yet to be issued) a designated beneficiary of an inherited retirement account will have 10 years to withdraw the money “in whatever fashion they would like.’ [Source: RIA Marketwatch.]

SECURE Act Distribution Rules: The SECURE Act seems pretty clear that a designated beneficiary of an inherited retirement account is subject to the 10-year distribution rule, unless the named beneficiary is also an eligible designated beneficiary, in which case the life expectancy payout is still permissible.

• 5-Year Rule: If the named beneficiary of the retirement account is neither a designated beneficiary (an individual or a see-through trust) nor an eligible designated beneficiary (a spouse, minor child, disabled, chronically ill, or less than ten years younger than the decedent) the prior 5-year distribution rule still applies if the decedent died prior to his or her required beginning date (age 72.) A non-designated beneficiary would be the decedent’s probate estate or a charity.
• Ghost Life Expectancy:  If the decedent was older than his or her required beginning date at the time of death, then the decedent’s ghost life expectancy can be used by a designated beneficiary to take required minimum distributions, which ghost period might be longer than the 10-year normal distribution period, but in that narrow set of circumstances, required minimum distributions must be taken by the designated beneficiary each year during that ghost life expectancy period.
• December 31: The 10-year distribution rule works just like the ‘old’ 5-year distribution period. No minimum distributions are required until the last day of the final year, either the fifth or the tenth year after the account owner’s death.

Conclusion:  The IRS used its old Publication 590-B as the basis for its updated version. Some mistakes were made in the ‘cut-and-paste’ that resulted in an updated version. Many of the existing examples that it used were not adjusted to reflect the SECURE Act’s new classification eligible designated beneficiary, nor did many of its examples clarify how the 10-year distribution rule permits a delayed distribution until the tenth anniversary year of the decedent’s death. While the Publication is somewhat helpful in providing guidance as to RMDs, it is also be misleading to anyone who reads many of its examples and skips the narratives that go along with the examples. Hopefully the IRS will produce soon a revised version of Publication 590-B with examples that reflect the RMD nuances created by the SECURE Act.