IRS Publication 590-B (Distributions from Individual Retirement Arrangements) discusses distributions from IRAs. Among the discussions in Publication 590-B are the required minimum distribution (RMD) rules for IRAs, including inherited IRAs.
Inherited IRAs are IRAs in which an individual was named the beneficiary of a deceased individual’s IRA. Note that RMD rules for inherited IRAs applies to both traditional and Roth IRAs.
The RMD rules regarding non-spouse beneficiaries – these beneficiaries include adult children, grandchildren and certain qualifying trusts – who inherit individual retirement accounts changed as a result of the passage of the SECURE Act in December 2019.
In particular, effective for IRA owners who die after Dec. 31,2019 and who had named someone other than an “eligible designate beneficiary” (EDB) as IRA beneficiary, the non-EDB is required to withdraw the entire amount of the inherited IRA within 10 years of the IRA owner’s death. EDBs include spouses of the deceased IRA owner, sisters or brothers who are no more than 10 years younger or older that the IRA owner, and children under age 18. However, once a designated child IRA beneficiary reaches age 18, the child becomes a non-EDB.
Previous to the SECURE Act’s passage, any individual who inherited an IRA had the option of receiving lifetime distributions from the inherited IRA. These lifetime distributions were calculated based on the individual’s remaining life expectancy. Under the SECURE Act, only EDBs have that lifetime distribution option.
On the other hand, under the SECURE Act non-EDBs must withdraw the entire inherited traditional IRA or Roth IRA within 10 years of the death of the original IRA owner. In the case of an inherited traditional IRA, that would mean paying federal and if applicable, state income taxes on the required IRA withdrawal. In the case of an inherited Roth IRA, that would mean in most cases not paying any federal and state income taxes on the inherited Roth IRA withdrawals.
The most important parts to understand from the “10-year” rule associated with the SECURE Act and inherited IRAs are:
(1) non-EDBs have 10 years to complete their withdrawals from their inherited IRAs; and
(2) non-EDBs are not subject to required minimum distributions (RMDs) within the 10-year period. In other words, they are not required to withdraw a minimum amount each year within the 10-year period. They can wait until the end of the 10-year period and make a lump-sum withdrawal of the entire inherited IRA account.
When IRS released Publication 590-B for 2020 in spring 2021, there was a section in the publication explaining the 10-year inherited IRA withdrawal rule. In its explanation, the IRS implied that there would be RMDs during the 10-year period, which, in fact, was not correct.
The IRS recently revised Publication 590-B to clarify and to correct its position on the 10-year rule. In particular, IRS states that there are no RMDs required provided that a non-EDB’s inherited IRA is withdrawn in its entirety by the end of the 10-year anniversary of the original IRA owner’s death.
The following example will illustrate:
Harold, a traditional IRA owner, died on July 15, 2020. Harold had named his adult daughter, Vivian, as the sole beneficiary of his traditional IRA. Vivian must withdraw her inherited IRA account no later than Dec. 31, 2030. Vivian is allowed – but not required- to make withdrawals on any amount she wants at any time prior to Dec. 31, 2030.
The IRS also clarified that while EDBs continue to qualify to receive lifetime distributions from their inherited IRAs based on the EDB’s life expectancy (thus the concept of the “stretch IRA”), the EDB can elect the 10-year rule. This is only true if the IRA owner’s death occurred before his or her required beginning date. For individual born before July 1, 1949, the required beginning date is April 1 following the year the individual becomes age 70.5; for individuals born after June 30, 1949, the required beginning date is April 1 following the year the individual becomes age 72.
In some situations, an EDB may prefer the flexibility of the 10-year rule rather than having to be locked into a rigid “stretch IRA” RMD schedule each year, even if that period may extend beyond the 10 years.
What is the Start and the End of the 10-Year Term?
In its recently revised 2020 version of Publication 590-B, the IRS states that the start of the 10-year term is the date of the original IRA owner’s death and the end of the 10-year period is December 31 of the year containing the 10th anniversary of the original IRA owner’s death.
However, in its revised Publication 590-B, the IRS contradicts this 10-year term definition for successor beneficiaries (individuals who have been named to inherit the balance left in the inherited IRA upon the EDB’s death), and minor children IRA beneficiaries once they reach the age of majority. The IRS states that the 10-year period for these successor beneficiaries or minor children once they reach the age of majority ends on the 10th anniversary of either the EDB’s death or the minor child reaching the age of majority, rather than at the end of the 10th year after the death of the original IRA owner’s death.
If that is what the IRS intends, the revised inherited IRA rules under the SECURE Act have gotten more complicated. In short, the IRS is saying that these successor EDB beneficiaries will have to keep track of the actual date of inherited IRA inheritance or the date of the minor child reaching the age of majority of age 18. With every successor EDB beneficiary be able to do this?
In short, in its revised Publication 590-B, the IRS did clarify aspects of the 10-year rule with respect to inherited IRAs. The good news is that the ending date for most new beneficiaries of IRAs is still approximately 10 years away. Most likely, the IRS will provide more clarification over the next 10 years as more non-EDBs receive inherited traditional and Roth IRAs from relatives.