tax alert: irs pledges to fix secure act 10-year rmd rule

the irs teases new update on ira beneficiary distribution rules.

update: irs admits mistake. official revision imminent

by seymour goldberg, cpa, mba (taxation), jd
special for 卡塔尔世界杯常规比赛时间

many practitioners are waiting for the department of the treasury to issue proposed regulations under the secure act that cover the required minimum distribution rules that apply to ira beneficiaries commencing in 2021.

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the distribution rules regarding an ira owner are not a big deal, but the distribution rules regarding an ira beneficiary or an ira trust are a big deal.

the irs attempted to clarify some of the rules by issuing  irs publication 590-b on march 25, 2021. this 65-page publication covers a great deal of information including the rules that apply to the beneficiary of an inherited ira account.

the publication, to a limited extent, provides a number of clues as to what distribution rules apply to the beneficiary of an inherited ira account starting in 2021 and thereafter under the secure act.

the big issue is: what are the distribution rules that apply if an ira owner dies on or after jan. 1, 2020, having selected a designated beneficiary of his/her ira account? this issue also applies when a trust for a designated beneficiary is selected as the beneficiary of an ira owner’s account and the ira owner dies on or after jan. 1, 2020.

it should be noted that as of march 25, 2021, the department of the treasury has not issued any proposed regulations under secure. the proposed regulations are what counts. it should be, in my opinion, extremely detailed when issued and can be relied upon by practitioners and the public.

what irs publication 590-b says is important but is subject to clarification by the proposed regulations under secure.

for purposes of this tax alert, we first have to define the words “designated beneficiary.”

a “designated beneficiary” is an individual who has been designated as the beneficiary of an ira account by the ira owner or under the default provisions of an ira agreement. however certain individuals are excluded from being considered as a designated beneficiary under the secure act.

if an individual is considered to be an “eligible designated beneficiary” then that individual is not considered to be a designated beneficiary.

an eligible designated beneficiary is:

(1) the surviving spouse of an ira owner subject to certain technical exceptions.

(2) the child of an ira owner who has not attained the age of majority as defined by the irs.

(3) a disabled individual.

(4) a chronically ill individual.

(5) any other individual who is not more than 10 years younger than the ira owner.

according to the secure act if an individual is a designated beneficiary, then the designated beneficiary is required in general to receive the deceased ira owner’s entire account balance by no later than the tenth year following the ira owner’s year of death in order to avoid the 50% irs penalty tax.

most practitioners are under the impression that under the secure act [with a certain probable technical exception] that the designated beneficiary can wait until the tenth year following the year of death of the ira owner to withdraw the decedent’s entire ira account balance and avoid the irs 50% penalty tax.

however, the wording in irs publication 590-b seems to indicate that required minimum distributions must be made to the designated beneficiary for the first nine years following the year of death of the ira owner. further that the decedent’s entire ira account balance must be paid to the designated beneficiary by the tenth year following the year of death of the ira owner.

the language in publication 590-b that creates this apparent nine-year timing issue discussed above follows:

other designated beneficiary

use the life expectancy listed in the table next to the beneficiary’s age as of his or her birthday in the year following the year of the [ira] owner’s death. reduce the life expectancy by 1 for each year since the year following the [ira] owner’s death. however, if you are a designated beneficiary who is not an eligible designated beneficiary, the entire account balance must be fully distributed within 10 years after the [ira] owner’s death.

the bottom line is to wait for the proposed regulations under secure to come out and indicate whether the apparent nine-year timing issue under irs publication 590-b is a real issue or not.

so, stay tuned. 

posted on may 16, 2021