July 2022 – By Tom C. Rueger, J.D., CFP®
Before the Secure Act was passed in December 2019, most non-spouse beneficiaries of an inherited IRA could “stretch” the period to take distributions from the inherited IRA based on the beneficiaries life expectancy. This was desirable because the beneficiary could usually defer withdrawing the bulk of the funds thereby deferring the bulk of the tax liability as well.
The Secure Act changed this by requiring that most non-spouse beneficiaries inheriting an IRA after 1/1/2020 must draw down the inherited IRA within 10 years after the death of the original retirement account owner (the 10-year rule). But what exactly did this mean? This was interpreted many ways with the consensus being that the beneficiary could let the entire balance grow tax-deferred, but they would need to empty the inherited account by the end of the 10th year.
The IRS issued guidance in February of 2022 (Proposed Regulations) on how most non-spouse beneficiaries of inherited IRAs will be required to take RMDs. This guidance may become the settled law by the end of 2022, but it may also change before it becomes final. The understanding at this point is that there are two different scenarios for RMDs based on whether the original retirement account owner died prior to or after their required beginning date.
If the retirement account owner died prior to their required beginning date the non-spouse beneficiary would be subject only to the 10-year rule. This means that the beneficiary is only required to empty the inherited account by the end of the 10th year after the original account owners death. Distributions prior to the 10th year would be allowed but are not required.
If the retirement account owner died on or after their required beginning date the non-spouse beneficiary would be subject to both the 10-year rule and the “stretch” distributions. This means that the beneficiary would have to take distributions based on their own life expectancy for the first 9 years then they would need to empty the inherited account by the end of the 10th year.
Stay tuned for more as we await final guidance from the IRS.
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