When Congress enacted the SECURE Act in 2019, one of the noteworthy changes related to the period over which beneficiaries were required to take IRA distributions. Before the SECURE Act, beneficiaries of inherited IRAs could “stretch” the required minimum distributions (RMDs) over their entire life expectancies. The stretch period could be decades for younger beneficiaries, meaning they could take smaller distributions and defer taxes while the accounts grew. However, in an effort to accelerate tax collection, the SECURE Act eliminated the rules that allowed stretch IRAs for many beneficiaries. For IRA owners or defined contribution plan participants who die in 2020 or later, the law now generally requires that the entire balance of the account be distributed within 10 years of death. Unfortunately, the IRS has muddied the waters with conflicting guidance. In 2021, the IRS published guidance that a beneficiary is allowed, but not required, to take distributions prior to the 10-year deadline. The IRS recently reversed this stance with a proposal that would force certain beneficiaries of IRAs to take annual RMDs.

The IRS’s proposed regulations focused on Internal Revenue Code 401(a)(9)(B)(i) and concluded that the beneficiary of an IRA owner who died after the owner’s required beginning date must take annual RMDs beginning in the first calendar year after the calendar year of the IRA owner’s death. The SECURE Act added a section requiring that the account balance of the inherited IRA must be fully distributed by the 10th calendar year after the calendar year of the IRA owner’s death. [Internal Revenue Code 401(a)(9)(B)(ii).] Thus, in order to satisfy both of those requirements, the proposed regulations provide that when the IRA owner dies after their required beginning date with a designated beneficiary who is not an eligible designated beneficiary, (i) annual RMDs must continue to be taken after the IRA owner’s death, and (ii) a full distribution of the inherited IRA is required by the end of the 10th calendar year following the IRA owner’s death.

In plain English, there will be annual RMDs based on the age of the designated beneficiary of the inherited IRA in years 1 through 9 following the IRA owner’s death, and a complete distribution of the inherited IRA in the 10th year.

example: Doug dies on September 20, 2022. Doug died after age 72, so Doug’s IRA was in-pay status, and he was subject to the RMD requirement. Doug named his daughter Flo as the beneficiary of his IRA. Payments from Doug’s IRA to Flo are subject to the SECURE Act’s 10-year rule. Flo must take annual required minimum distributions in each of the 9 years that follow the year of Doug’s death, based upon what would have applied under the pre-SECURE Act rules. All remaining assets in the inherited IRA must be distributed to Flo by December 31, 2032.

The only exceptions are for “eligible designated beneficiaries” who include the following:

  • A spouse
  • A minor child (the Proposed Regulations define as under age 21)
  • A disabled person
  • A chronically ill person
  • A beneficiary who is less than 10 years younger than the IRA owner (typically a sibling)

Those who inherit IRAs from individuals who have not yet reached their required beginning date at the time of death are also required to take RMDs for years 1-9 with the full amount being distributed by year 10.

On October 7, 2022, the IRS published its Notice 2022-53 which announced that it will not impose penalties on a designated beneficiary who failed to take specified RMDs for 2021 and 2022 that were required under the provisions of the 2019 SECURE Act. The IRS noted that a number of commentators voiced strong objections to this interpretation of the law, and many designated beneficiaries who inherited IRA accounts had not taken any distributions in 2021. Since the IRS did not release its proposed regulations until February 24, 2022, it was too late for many designated beneficiaries to take timely required distributions for 2021. The IRS still has not made the proposed regulations final, but is expected to at some point in late 2022 or early 2023.

Accordingly, the provisions of the proposed regulations will apply no earlier than 2023: “To the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under IRC 4974. If a taxpayer has already paid an excise tax for a missed RMD in 2022 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax.”

The Notice also provides relief to defined contribution retirement plans that did not make a specified RMD to a designated beneficiary: “A defined contribution plan that failed to make a specified RMD will not be treated as having failed to satisfy Section 401(a)(9) merely because it did not make that distribution.”

The good news is that those designated beneficiaries who failed to take an RMD in 2021 (or 2022) based upon prior guidance will not be punished by the imposition of a penalty for their failure to take an RMD. The bad news is that the IRS is sticking with its interpretation of the tax code and is expected to make the proposed regulations final requiring annual RMDs for most beneficiaries from an inherited IRA.