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. SECURE 2.0 Act further increases the age for required minimum distributions age to 73 starting on January 1, 2023 and 75 starting on January 1, 2033. 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 some inherited retirement accounts 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 that qualify for the waiver for 2021 and 2022. Notice 2022-53 is a “free pass” for those distributions.
The following “eligible designated beneficiaries” don’t qualify for the waiver: surviving spouse, minor child of the deceased participant, a beneficiary who is disabled or chronically ill, and an individual who is none of those previously listed and who is not more than ten years younger than the deceased participant. Those beneficiaries qualify for “life expectancy” distributions, starting with the year after the death of the participant.
The distribution for the year of death of the participant who died after the required beginning date also doesn’t qualify for the waiver.
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.
Congress did not change the rules for required minimum distributions for IRAs and qualified retirement accounts in SECURE Act 2.0.