In December 2019, the SECURE Act (version 1.0) flew through the House and Senate, attached to an appropriations bill. The measure, which stands for Setting Every Community Up for Retirement Enhancement, was the biggest piece of retirement legislation enacted since the Pension Protection Act of 2006. Convinced of this, I cleared my schedule to study the bill and the impact it would have on our retired clients.
Three months later, the world shut down. No one seemed to care about the SECURE Act. Unfortunately, the changes it initiated for retirement plan beneficiaries have produced a new group of adult children who, understandably, have no idea what they need to do with their inherited IRAs. While I’m going to use IRAs as the example throughout the article, the new rules apply to all defined contribution plans, including 401(k)s, 403(b)s, TSPs, etc.
In this article, we are focusing on non-spouse beneficiaries who inherited IRAs from people who died after Dec. 21, 2019. This group is now known as “non-eligible designated beneficiaries” and will feel the biggest impact of this legislation. The now-infamous “10-year rule” applies to them. At the highest level, it says that the retirement account must be emptied by Dec. 31 10 years after the date of death. This accelerates distributions for many, which can have adverse tax consequences, and it requires a new level of tax planning to maximize after-tax income.
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Where to start with an inherited IRA
I’m guessing, and hoping, that when you lose a parent, you are not thinking about when you’ll have to split their IRA into inherited IRA(s). Unfortunately, if there are multiple beneficiaries, that’s exactly what you’ll have to do. You’ll want to establish an inherited IRA at the current custodian.
So, if the money is at Fidelity, open the account at Fidelity. Once the funds have been transferred, it is up to you and any other beneficiaries to take any RMDs (required minimum distributions) that were not taken by the original owner in the current calendar year. Once all this is done, you can transfer the money to the custodian of your choosing.
While we are covering SECURE 1.0, as of this writing in September 2023, components of SECURE 2.0 impact how and when you’ll have to take distributions from your new account. The chart below illustrates when you would have to start taking RMDs from your own account. Don’t confuse this with when you have to start RMDs from your inherited account. We simply (maybe not so simply) need to know whether or not the decedent would have been taking RMDs when they passed to know whether or not we have to.
| DOB/birth year | First RMD |
|---|---|
| 6/30/49 or earlier | 70½ |
| 7/1/49-12/31/50 | 72 |
| 1951-1959 | 73 |
| 1960+ | 75 |
April 1 of the year after the year of your first RMD is known as your RBD — required beginning date. (I thought you might want another acronym.) Example: If your birthday is May 23, 1949, you are beyond your required beginning date. If your birthday is May 23, 1959, you have not yet reached your required beginning date.
10-year rule changes some things
When the initial SECURE Act went into effect, it didn’t appear to matter when the account owner died. The 10-year rule applied to all non-eligible designated beneficiaries. If an account owner died in 2020, the beneficiary account would have to be emptied by Dec. 31, 2030. How and when the beneficiaries took those distributions didn’t matter. IRS Publication 590-b reinforced this point.
However, in February 2022, the IRS issued proposed regulations seeking to split this new group of beneficiaries into two: those who inherited from a decedent before their RBD and those who inherited from a decedent who died after their RBD:
If the decedent died before their required beginning date: The 10-year rule, as it was initially interpreted, stands. The account must be fully withdrawn by Dec. 31 of year 10. In years one through nine you are not required to do anything. This would lead the competent planner to increase distributions in lower-income years and decrease distributions in higher-income years to mitigate the tax consequences of withdrawals.
If the decedent died after their required beginning date: The 2022 proposed regulations, emphasis on “proposed,” introduce an additional component: regular stretch distributions. The beneficiary would have to take RMDs as they would have before SECURE 1.0, in every year. Any additional amounts left in the account would have to be fully distributed at the end of the 10-year period. As you may imagine, this threw the planning community — at least those who were aware of it — into a panic. Not only was this unclear over the last two years, it introduced a level of complexity that very few would be able to navigate.
Two IRS notices have been released since February 2022. They waive the penalty for any missed RMDs from inherited IRAs for 2021-2023. They also punt as to when the final regulations will be released.
Now it looks like we will have to hold our breath until 2024 to find out what the rules actually are. Like so many things related to our tax code, this may confuse and frustrate you. If you want clarity on your specific situation, please contact me directly at EBeach@exit59advisory.com or reach out through my company website, exit59advisory.com.
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