Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must  distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.

RMD BasicsOwners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must  distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.

IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.

RMD Basics
Owners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.

The required beginning date (RBD) for the first year must be taken  by April 1 of the next year. After the first distribution, annual distributions must be taken by the end of each year. Note,  if the first distribution is delayed until April 1 two distributions will be required for that year, one by April 1 and the other by December 31.

The RMD rules govern how quickly retirement plans and/or IRAs must be distributed by the beneficiaries of the accounts. The rules are largely based on two factors: (1) the individuals named as beneficiaries of the retirement plan, and (2) whether the owner dies before or on or after your RBD. Because no lifetime RMDs are required from a Roth IRA, Roth IRA owners are always treated as dying before their RBD.

Who Is Subject to the 10-Year Rule?

Eligible designated beneficiaries (EDBs) are permitted to stretch out distributions to a limited extent. EDB’s include your surviving spouse, your minor children, any individuals not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.

Note that the SECURE Act requires that if a designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.

What If the Designated Beneficiary Is Not an EDB?
If you die before your required beginning date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.

If you die on or after your required beginning date, annual distributions based on the designated beneficiary’s remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.

What If the Beneficiary Is a Nonspouse EDB?

Annual distributions will be required based on your remaining life expectancy. If death occurs before the required beginning date, required annual distributions will be based on the EDB’s remaining life expectancy. If the owner of the account dies on or after their required beginning date, annual distributions after the owner’s death will be based on the greater of (a) what would have been the owners remaining life expectancy or (b) the beneficiary’s remaining life expectancy. Also, if distributions are calculated each year based on what would have been the remaining life expectancy, the entire account must be distributed by the end of the calendar year in which the beneficiary’s remaining life expectancy would have been reduced to one or less (if the beneficiary’s remaining life expectancy had been used).

After the death of the  beneficiary or if the beneficiary is a minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the tenth year.

What If a Designated Beneficiary A Spouse?
There are many special rules if a spouse is a designated beneficiary. The 10-year rule generally has no effect until after the death of the surviving spouse, or possibly until after the death of the spouse’s designated beneficiary.

What Life Expectancy Is Used to Determine RMDs After Death?

Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).

When life expectancy is used, the applicable denominator is the life expectancy in the calendar year of death, reduced by one for each subsequent year.  When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.

The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new proposed regulations, apply to your individual situation.