From the law is a moving target department: The SECURE Act (Setting Every Community Up For Retirement Enhancement) became law on January 1, 2020 and made several changes to the rules for retirement accounts. One provision is that non-spouse beneficiaries of IRAs, with a few exceptions, must deplete the account within 10 years of the original owner’s death. This applies to all deaths after January 1, 2020. With this requirement, the SECURE Act put an end to the IRA Stretchout Trust, which had enabled children/grandchildren inheriting an IRA to take required minimum distributions (RMDs) over the course of their own lifetime.
Legal experts who analyzed the SECURE Act assumed the new 10-year rule would work like the existing 5-year rule for IRAs whose owners died prior to 72 and that had no designated beneficiary: although all funds had to be depleted within that time frame, no annual RMDs were required. However, with the publication of IRS 590-B on March 21, 2021, it appears that the Internal Revenue Service may have other ideas.
590-B appears to suggest that not only would non-spouse beneficiaries of IRAs have to empty the entire account within ten years, but also might have to take annual required minimum distributions in years 1-9. Those withdrawals would be based on the beneficiary’s own age and life expectancy. If this comes to pass, the tax implications are significant. Beneficiaries of traditional IRAs would have to pay taxes on their withdrawals, based on their tax bracket. Beneficiaries of Roth IRAs would lose the opportunity for the entire amount to grow tax-free before withdrawing it all at the end of the ten-year period.
The IRS rule has not been finalized and is now open for public comment. Non-spouse IRA beneficiaries should be aware that depending on what happens, they may have to take a withdrawal this year. For now, it’s just watch and wait. As Yogi Berra said, it ain’t over till it’s over.
You can read the proposed rule here ( scroll to pages 11 – 12)