Earlier this year the IRS released proposed regulations on the SECURE ACT.   The SECURE ACT made drastic changes to the rules governing inherited retirement accounts, effective January 1, 2020, but there has been little guidance from the IRS on the Act’s provisions until now.

The SECURE ACT seemed to replace the rule that a designated beneficiary must take out a yearly required minimum distribution (“RMD”) based upon his or her life expectancy (the “Life Expectancy Rule”) with a simple requirement that an inherited account need only be emptied by the end of the year containing the tenth anniversary of the original account owner’s death (the “10-Year Rule”).   However, this is not how the IRS interprets SECURE in the proposed regulations.

The proposed regulations provide that the 10-Year Rule is in addition to the Life Expectancy Rule.  The result is that a designated beneficiary (who is not an eligible designated beneficiary) must take out a RMD each year and then a balloon of the remaining account balance before the end of the tenth year.  Failure to do so will subject any unwithdrawn amount to a 50% excise tax.

It is yet to be seen how the IRS will treat the many retirement account beneficiaries who have not taken out a yearly RMD since the effective date of the SECURE ACT, believing that the 10-Year Rule replaced the Life Expectancy Rule, but there is generally relief in this sort of situation as long as a taxpayer acted in accordance with a reasonable interpretation of the law, something that the former interpretation sure seems to be.

The takeaway is this: originally the SECURE ACT seemed to simplify the rules governing post death distributions from inherited retirement accounts, but this is not the case.  Things have just become more complicated.  Thus, it is imperative to obtain guidance from a knowledgeable source if you will be or have inherited a retirement account.

Note that there are different distribution rules for eligible designated beneficiaries, non-designated beneficiaries, and even designated beneficiaries when the original account owner dies before his or her required beginning date (generally age 72).  

This blog post is provided for informational purposes only and by its very nature is general.  This post does not discuss a host of other rules, exceptions, and intricacies to this very complicated topic.   This information is not intended as legal advice and should not be relied upon. 


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