The SECURE Act (the Act), which was passed by Congress at the end of 2019 and became effective on Jan. 1, 2020, made numerous changes to retirement plan rules, particularly related to the distribution of accounts inherited upon a participant’s death. However, its enforcement was left unclear and provided plan beneficiaries with little guidance to manage these inherited accounts. We share the details in this article and what beneficiaries and retirement plan owners need to know.
Treasury releases new proposed regulations under the SECURE Act
On Feb. 23, 2022, the U.S. Department of the Treasury (Treasury) released proposed regulations under the SECURE Act, which offer Treasury’s interpretation of the new law. While the proposed regulations are largely taxpayer-friendly and offer welcomed clarification, Treasury’s interpretation of the required distributions from inherited retirement accounts seems in direct contradiction to the existing statute and regulations.
The Act stipulates a new requirement for most beneficiaries of retirement accounts. Historically, beneficiaries could stretch distributions over their life expectancy, thus extending — and effectively easing — the tax obligations over many years. Under the new requirement, however, beneficiaries would need to withdraw the assets from the account within 10 years of the account owner’s death. For tax-deferred accounts, this accelerates the income taxes due on the deferred assets.
The IRS caused confusion when it released an updated version of Publication 590-B in early 2021, which indicated that there would be required minimum distributions in the years leading up to the 10th year. The new guidance, referencing a dated version of the Publication 590-B, didn’t take into account changes under the Act. Noting this oversight, the IRS issued a revised Publication 590-B in May 2021, which made it clear that distributions weren’t required until the 10 year.
Despite this apparent clarification of the 10-year rule, the new proposed regulations have once again confused advisors and beneficiaries. The proposed regulations issued in February 2022 now clearly state that beneficiaries of decedents’ accounts who pass after the required distribution age — 72 under the Act — are required to take annual distributions before the 10 year. Whereas when the decedent passes away before age 72, no distributions are required before the 10 year.
Clarifications for taxpayers
Aside from these contradictions, the proposed regulations provide much-needed clarification on a number of other SECURE Act provisions, many of which are taxpayer-friendly. The new guidance:
- Clarifies the criteria for what constitutes a disabled beneficiary, and thus, a beneficiary’s eligibility to stretch distributions from IRAs over their life expectancy. This includes a safe harbor that a beneficiary is disabled if they’ve been deemed so by the Social Security Administration.
- Defines 21 as the age of majority for the required minimum distribution rules, regardless of the definition under state law.
- Clarifies how required minimum distribution rules are applied where there are multiple beneficiaries of an IRA.
- Provides rules for determining if a trust is a designated beneficiary and eligible for the 10-year distribution rule, rather than five years.
- Provides an allowance of life expectancy distribution for IRAs held in an accumulation trust for an eligible-designated beneficiary. (Eligible-designated beneficiaries include disabled or chronically ill beneficiaries, a surviving spouse, a minor child, or a beneficiary not more than 10 years younger than the decedent.)
Considerations going forward
While the proposed regulations don’t have the force of law, taxpayers are required to take into account a good-faith interpretation of the SECURE Act, and compliance with the proposed regulations are deemed to satisfy that requirement. Accordingly, taxpayers should proceed as if the regulations will stand as currently written, but it may be prudent to defer any required distributions until later in the calendar year, as it’s possible that modifications will be made to the Proposed Regulations by that point.
If you have any questions about how these new regulations will impact your financial or tax planning, please feel free to contact us.
