Proposed regulations REG 105954-20 implementing the SECURE Act, issued by the IRS on February 24, 2022, included a surprise provision. (https://www.federalregister.gov/documents/2022/02/24/2022-02522/required-minimum-distributions)
Under the SECURE Act, when a retirement account (including an IRA) is inherited after 2019, the balance is generally required to be distributed by the year that includes the 10th anniversary of the date of death. No other distributions would be required before that date. This follows the procedure for a five-year rule that applied for retirement accounts before 2020.
Under the proposed regulations, an additional rule applies for retirement accounts when the decedent was required to take minimum required distributions as of the date of death. The required beginning date was April 1 for the year following reaching age 70 1/2 and was raised to age 72 for people born after June 30, 1949 by the SECURE Act. The new rule is the beneficiary must receive required minimum distributions over the greater of the beneficiary’s life expectancy or the life expectancy of the decedent as of the date of death during years one through nine, and the balance of the account on the earlier of (1) the year that includes the 10th anniversary of the participant’s death or (2) the final year of the beneficiary’s life expectancy.
This was a surprise because, under the five-year rule, there was no requirement to continue required minimum distributions.
The IRS has provided some relief in Notice 2022-53. (https://www.irs.gov/pub/irs-drop/n-22-53.pdf.) The 50% penalty for failure to make a required minimum distributions is waived for failure to make a required minimum distribution from an inherited retirement account for 2021 and 2022 when the account was inherited after 2019 and the participant died on or after the required beginning date. (Required minimum distributions for 2020 were previously waived under the CARES Act.) No “make up” is required for missed distributions for 2021 and 2022. Notice 2022-53 is a “free pass” for those distributions.
If your family had a retirement account that was inherited after 2020, now would be a good time to meet with a tax advisor about the required minimum distribution requirements.
Possibly Congress will revisit this situation in Secure Act 2.0, now in process.