A new twist to the inherited IRA 10-year distribution rule
For those who’ve inherited an IRA since the beginning of 2020, a recent IRS publication has generated some confusion regarding taking distributions under the SECURE Act’s “10-year rule.” Here’s what you need to know.
Starting in 2020, the SECURE Act changed the required minimum distribution (RMD) rules for many individuals inheriting an IRA from that year forward but didn’t apply for inherited IRAs already in place. While certain “designated beneficiaries” were still able to “stretch” the IRA over their lives, the new rules significantly impacted most nonspouse beneficiaries. For this group, the change meant beneficiaries would have to empty the IRA by the end of the 10th year after the original owner passed.
At the time the SECURE Act took effect, most industry experts interpreted the guidance as allowing inherited IRA owners full flexibility to choose when distributions occurred. In other words, as long as the account was empty by the end of year 10, the general consensus was that it didn’t matter how and when distributions occurred. This view was informed by the SECURE Act language, committee reports, and guidance related to the preexisting “five-year rule” applicable to certain circumstances.
However, the recently published 2020 IRS Publication 590-B has created considerable uncertainty around the interpretation of the SECURE Act provisions. This updated Publication implicated that those inheriting IRAs starting in 2020 must distribute a minimum amount each year using the same process and calculation in place prior to the SECURE Act. The only change, the Publication seemed to suggest, is that whatever remains in year 10 must be completely distributed at that time.
It’s important to note that the example in the Publication that appears to require annual distributions under the 10-year rule was simply carried over, word for word, from the prior version and therefore doesn’t represent new guidance.
The IRS has since acknowledged that the implication that annual distributions are required under the 10-year rule was an error. The IRS further indicated that revisions will be made to Publication 590-B to clarify the application of the 10-year rule. In the meantime, if you have any questions about how the SECURE Act may affect you, contact your relationship manager.