In 2019 Congress passed legislation to overhaul the regulations governing retirement account assets, contributions, and eligibility. This legislation, despite its numerous detailed regulatory amendments was intended to have two primary effects: one, to increase individual eligibility and contribution levels to retirement accounts and two, to accelerate tax revenues generated through the eventual distribution of those assets. This legislation was coined “The SECURE Act”.
For the purpose of our discussion, the key change in this legislation was that inherited IRAs are now subject to complete liquidation by the beneficiary, over the ten years following the decedent’s death. Historically, all beneficiaries could stretch the account distributions over their own life expectancy (and thus stretch the associated tax from that income). Any non-eligible beneficiaries* must now recognize that income much more quickly. As a result, Uncle Sam also gets his cut of the income far sooner.
*In simplest terms, a non-eligible beneficiary is anyone who does not meet one of 5 conditions: the decedent’s spouse, a disabled person, a chronically ill person, a minor, or someone no more than 10 years younger than the decedent. It also bears mentioning that the minor beneficiary in this case would have to begin the 10-year liquidation rule upon reaching the age of majority in their state (18 or 21).Therefore, rather than a lifetime distribution schedule, you now only have 10 years to deplete the account. At least now you get to control whether or not you take a distribution each year, right? Perhaps you could push off realizing that income until you retire a few years down the road. Unfortunately, that may not be the case.
In February 2022, the IRS proposed new regulations, which in effect, would be “the SECURE Act 2.0”. The regulations address many of the same topics that the initial legislation targeted and, in most cases, further enable individuals to manipulate withdrawals and contributions to their retirement accounts. However, there is one key issue. “The SECURE Act 2.0” proposes that inherited IRAs created in 2020 and beyond must now take an annual required minimum distribution (RMD) in each of the 10 years. This further accelerates income to the government, limits an individual’s ability to manage income for tax considerations, and diminishes the already strained opportunity for tax-deferred growth. What’s more is that those inherited IRAs in 2020 and 2021 are now potentially subject to making up for “missed” RMDs.
At this point the proposal is just that – a proposal. Congress has not ratified any such proposal into law and the progress towards doing so appears stagnant. Thankfully, the consensus opinion, in the case that these accounts do become subject to RMDs, is that there will not be a penalty for those account owners who have “missed” distributions. In other words, the historical 50% penalty on missed RMDs does not appear to be on the table. After all, how could it? There was no indication that it would be required. Still, individuals may have to amend returns or double-down on distributions once legislation is passed, but at least there will not be a regulatory penalty assessed.
Now we wait… Will there be RMDs? Possibly. How will they be calculated? No one really knows – although common sense would point to some form of 10-year annuitization (regardless of the account owners age). When will we know? Many hope to have guidance before the end of 2022, but more pressing economic issues dominate the zeitgeist at present.
So, what should I do if I have an inherited IRA created in 2020 or beyond? Don’t panic, be patient – because at this point, we just don’t know. Consult your financial advisor and accountant. They should have their finger on the pulse of what is to come and how best to prepare. If you do not have counsel from a professional advisor and are concerned about your potential course of action, please reach out. We are well equipped to assist you.
