the practitioner’s guide to ira distribution rules under the secure act [updated & expanded]

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new developments now make irs compliance a major issue in retirement distribution planning for ira owners and ira beneficiaries.

beware: the new ten-year rule that applies if ira owner dies before, on, or after his/her required beginning date having a designated beneficiary of the ira account.

accountants and tax practitioners serving the many taxpayers who have accumulated considerable assets in their retirement accounts – including from 401(k)s, any other type of qualified plans, a 403(b) arrangements, a 457 governmental plans, traditional iras, and roth iras – need to know the potential pitfalls and best strategies.

estate and income tax planning are more important than ever, especially under the secure act. this guide covers many of the rules that you need to know under the secure act for the client who has retirement assets.

the devil lies in the details. and the details are all about the deadlines. the secure act has many deadline rules that have to be tracked in order to avoid irs penalties. you must become familiar with these deadlines.

updated!
executive resource summary of the guide

overview

• changes in the retirement distribution rules under the secure act
• lifetime rules not changed under the secure act
• change in required beginning date and effective date of change
• repeal of maximum age for making traditional ira contributions
• five-year rule under pre-secure still applies if ira owner dies before required beginning date without having a designated beneficiary or eligible designate beneficiary of his/her ira account
• remaining life expectancy rules under pre-secure still apply if ira owner dies on or after his/her required beginning date without having a designated beneficiary or eligible designated beneficiary of his/her ira account
• designated beneficiary rules discussed
• eligible designated beneficiary rules discussed
• transition rules discussed when ira owner dies prior to january 1, 2020, having a designated beneficiary of his/her ira account
• successor beneficiary rules apply after death of eligible designated beneficiary iii

the new retirement distribution rules

• repeal of maximum age for making traditional ira contributions with example
• change in the effective date for required minimum distributions (old law and new law) with example
•  discussion of the 5-year rule if ira owner dies prior to his/her required beginning date having a beneficiary of his/her ira account who is not a designated beneficiary or eligible designated beneficiary with examples
• violation of 5-year rule and 50% penalty
• violation of 5-year rule and liability of executor or personal representative of ira owner
• application of remaining life expectancy rule if ira owner dies on or after his/her required beginning date without having a designated beneficiary or eligible designated beneficiary with examples
• application of 5-year rule if ira owner died before the required beginning date
• exceptions to the 10-year rule for an eligible designated beneficiary such as disabled beneficiary, chronically ill beneficiary and surviving spouse
• beneficiary.  warning that complex special rules apply when surviving spouse is the sole beneficiary of an ira owner
• complex special rules when surviving spouse is sole beneficiary of an ira owner including major tax traps that practitioners in the author’s opinion may not be aware of with examples; also includes in part a detailed discussion regarding trustee-to-trustee transfers between iras
• application of distribution rules for child who has not attained majority with examples
•  application of distribution rules for a grandchild

appendix a

updated life expectancy and distribution period tables effective as of january 1, 2022.  includes discussion and application of transition rule that is applicable in 2022

appendix b

articles and informational materials on retirement distribution compliance issues

• non-compliant trusts and circular 230 issues. based in part on pre-secure distribution rules. however, article still relevant regarding
  circular 230 issues and october 31 deadline issue.
• ira trust instructions
• customized sample beneficiary forms
• advantages of trusts as ira beneficiary
  • item 17.  use of protective trust as ira beneficiary for estate tax liquidity purposes.
  • item 18. practical reasons for using standalone inter vivos ira trust instead of testamentary ira trust
• disadvantages of trusts as ira beneficiary
• common errors in retirement distribution planning
  • see also excessive use of tod accounts can adversely impact estate liquidity for payment of estate administration expenses and estate tax liabilities; discussion on need to have retirement assets payable to a trust if there are insufficient probate assets to pay estate tax liabilities
• why many beneficiary forms are defective
• statute of limitation issues involving ira penalties
• internal revenue manual (irm) discusses the statute of limitations for form 5329
• what you should know about the one-per-year limit on rollovers that you don’t know
• income in respect of a decedent
• ird and practitioner tips
• titling an inherited ira under an ira trust b-48

new!
supplement to the practitioner’s guide

table of contents

1. analysis of key issues found in the irs proposed regulations under the secure act
2. designated beneficiary
3. required beginning date under secure
4. death before the required beginning date
5. death on or after the required beginning date
6. eligible designated beneficiary
7. age of majority
8. definition of disability
9. documentation requirements for disabled or chronically ill status
10. dual eligible designated beneficiary status
11. other rules related to eligible designated beneficiaries
12. eligible designated beneficiary who is not more than 10 years younger than the [ira owner]
13. rules that apply when an ira owner has a child beneficiary that has not attained the age of majority (the child’s 21^st birthday) at the time of the ira owner’s death
14. transition rules if ira owner died before january 1, 2020
15. rules that apply when the eligible designated beneficiary is disabled and the documentation requirements are timely satisfied
16. rules that apply when the eligible designated beneficiary is chronically ill and the appropriate documentation requirements are timely satisfied
17. rules that apply when the eligible designated beneficiary qualifies [only] as a result of being an individual who is not more than 10 years younger than the ira owner
18. rules for surviving spouse as eligible designated beneficiary
19. trusts as beneficiary of an ira
20. applicable multi-beneficiary trusts
21. comments to irs letter ruling 200644022 dated august 22, 2006
22. waiver of penalty rules under secure

trouble!
issues in the irs proposed regulations

by seymour goldberg

the irs proposed regulations are extensive and 275 pages in length.

the introductory part (preamble) of the proposed regulations, although complex, may be the best way to learn the many secure distribution rules. according to the irs, the proposed regulations are to apply for purposes of determining required minimum distributions for calendar years beginning on or after january 1, 2022.  for the 2021 calendar year, taxpayers must apply the existing regulations but taking into account a reasonable good faith interpretation of the amendments made by sections 114 and 401 of the secure act.

changing the rules in the middle of the game

section 114 of the secure act changes the required beginning date rules.

one of the big issues is what happens if many [designated beneficiary] taxpayers who inherited ira accounts in 2020 failed to take any required minimum distributions from those inherited ira accounts in 2021 if the ira owner passed away in 2020 and after his/her required beginning date.  under the proposed regulations if an ira owner died after reaching his/her required beginning date having a designated beneficiary, then the designated beneficiary had to commence receiving the required minimum distributions in the year after the death of the ira owner.

the proposed regulations were released by the irs on feb. 23, 2022.  up until that date taxpayers of inherited ira accounts who were designated beneficiaries were advised that if they inherited an ira account in 2020 they had until the end of 2030 to receive the inherited ira account proceeds without any irs penalty sanctions.  these taxpayers were advised that it did not matter whether or not the deceased ira owner died before, on, or after his/her required beginning date.  it would seem that the irs would have to issue a waiver of some type to relieve the ira beneficiary from any irs penalty sanctions.

headaches for tax preparers

imagine if, say, 200,000 [designated beneficiary] taxpayers inherited ira accounts in 2020 from ira owners who had passed away after their required beginning date and none of them took any required minimum distributions from these inherited ira accounts in 2021.

the tax preparer for such taxpayers would have a real headache in first learning which clients have the headache.

the tax preparer may not even know how to identify the taxpayers that have the headache much less determine the extent of the headache.

in addition, the tax preparer may not be aware of the issue or, if aware, the tax preparer may not have the time to figure out the amount of the headache.

such a tax preparer during the busy tax season may have to charge the client for the time it takes to determine the extent of the headache.

probably, the irs should just have an automatic waiver of the penalty and allow the headache amount to be received and reported on the taxpayer’s 2022 income tax return.  the reason is that tax preparers may not have the time to learn about the issue until after the 2021 filing season.

i am not aware of any rule that would permit the irs to say that if you did not know about the headache that the irs can just say forget about fixing the headache.  that type of relief would probably require legislative action.

tax preparers need irs guidance

the bottom line is that the tax preparer must be given guidance by the irs as to what action to take in order to avoid circular 230 issues.  since the proposed regulations came out on feb. 23, 2022, how could the designated beneficiary taxpayer know about the compliance obligation in 2021 when such an ira beneficiary was advised that he or she could wait to receive the inherited ira account proceeds until the end of 2030, based on the 10-year rule?  the designated beneficiary taxpayer had reason to believe that the 10-year rule allowed a 10-year deferral regardless of whether or not the deceased ira owner died before or on or after the deceased ira owner’s required beginning date.

 

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about the author

seymour goldberg, cpa, mba, jd, is a senior partner in the law firm of goldberg & goldberg, p.c., melville, new york. professor emeritus of law and taxation at long island university. former director of the tax institute of the c.w. post campus of long island university. recipient of the american jurisprudence award in federal estate and gift taxation from st. john’s university school of law.

cle instructor for many professional organizations including the new york state bar association, american bar association, njicle, city bar center for cle, local bar associations, and law schools.  mr. goldberg is admitted to practice law in new york state.

authored 4 manuals for the american bar association on iras and on trusts as well as for other organizations such as the aicpa on the ira distribution rules.  his first guide entitled “a professional’s guide to ira distribution rules” was published by the foundation for accounting education for the years 1993 to 1998.  he has been interviewed on many technical ira issues for ed slott’s ira advisor.

mr. goldberg handles probate matters, tax disputes with the irs and the irs appeals office, ira penalty waivers, and new york state department of taxation tax disputes. represents clients in irs ruling requests (over 75). wrote an amicus brief in 2014 inherited ira supreme court case, clark v. rameker.

his manuals for the american bar association can be found in well over 100 law school libraries throughout the united states. he is a member of the relations with the irs committee of the new york state society of certified public accountants.  he was formerly associated with the internal revenue service

mr. goldberg has conducted continuing education courses with the irs on the retirement distribution rules. he has recommended corrections to irs publication 590 working pro bono with the irs and then-congressman steve israel. this resulted in irs revisions and the adoption of irs publication 590-a and irs publication 590-b.

he is the recipient of outstanding discussion leader awards from both the aicpa and the foundation for accounting education. he has conducted well over 300 cpe programs in the field of taxation including over 100 cpe programs involving iras and ira compliance issues.

mr. goldberg has been quoted in the new york times, forbes, fortune, money magazine, u.s. news & world report, business week, and the wall street journal. he has also been interviewed on cnn, cnbc, and wcbs.

mr. goldberg can be reached at 516-222-0422 or by email at info.goldbergira [@] gmail.com.