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George F. Bearup, J.D. Senior Legal Trust Advisor

13-Apr-21

SECURE Act Confusion

Take-Away: Just when we thought we were finally beginning to understand the SECURE Act, the IRS throws us a curve ball on the 10-year distribution rule.

Summary: On April 9, 2021 the IRS issued Publication 590-B with regard to Distributions from Retirement Account Arrangements. In that Publication (page 12) the IRS provides an example which is not how everyone has been interpreting the SECURE Act’s 10-year distribution rule.

IRS Example: Father dies in 2020 with a $100,000 traditional IRA. Father names child as the designated beneficiary of his traditional IRA. There is no mention of the child being a minor, disabled, or chronically ill. Using the IRS’s Tables, the child has a life expectancy of 31.4 years. Therefore, according to the IRS, the child’s required minimum distribution is $3,185 for 2021. That is the example.

Confusion: This example came as a big surprise to those who think they understand the SECURE Act. Everyone thought with the SECURE Act that a designated beneficiary could wait until December 31 of the 10th year of the IRA owner’s death in which to take the final distribution and empty the inherited IRA. The example makes no reference to the child delaying any distribution from the inherited IRA until that 10th anniversary year. Also, with the mandatory 10-year distribution rule under the SECURE Act, there should not be any reason to refer to the beneficiary’s life expectancy, other than for those beneficiaries who are classified as eligible designated beneficiaries. However, the example does not provide a key missing fact that the child is either a minor, or disabled or chronically ill which might otherwise explain the reference to the child’s life expectancy.

Conclusion: Maybe the IRS just forgot to add a key fact in it’s example, which it will promptly fix. Or, the IRS looks at the 10-year distribution differently than everyone else who has studied the SECURE Act. Until this ambiguity is cleared up, it would be wise for those who inherit IRAs to hold off taking a distribution until later in the year.