Important Update to Inherited IRAs and Retirement Plans Under the SECURE Act

The SECURE Act of 2019 changed the distribution rules for inherited IRAs and other retirement plans by eliminating the life expectancy payout (“stretch IRA”) for most beneficiaries. In February 2022, the U.S. Treasury issued a notice of proposed regulations regarding these new distribution rules.

These proposed regulations change how practitioners have been interpreting distribution rules for inherited IRAs under the SECURE Act. The SECURE Act eliminated the life expectancy payout for most beneficiaries by imposing a ten-year payout rule. For more than two years practitioners, including Natalie Choate, the guru of retirement plan distributions, interpreted the SECURE Act under the ten-year rule as not requiring distributions until the tenth year after the owner’s (participant’s) death regardless of whether the owner died before or after his/her required beginning date (“RBD”).

The proposed regulations surprised everyone by providing that a beneficiary who inherits an IRA or retirement plan from an owner who died on or after his/her RBD must take required minimum distributions under the at-least-as-rapidly rule, using their life expectancy, until the tenth year when the remaining balance must be distributed. This means there is annual track of distributions for years one though nine and an outer limit year (the ten-year rule) when the entire balance must be paid out.

What should you to do if you inherited an IRA or other retirement plan after 2019 and did not take a distribution in 2021 required under the ten-year payout rule as interpreted by the proposed regulations? The proposed regulations, effective for the year 2022, state that any reasonable interpretation of the rules as modified by SECURE will be deemed compliant. Further guidance will most likely be issued on this matter. Natalie Choate says be prepared to take both 2021 and 2022 required minimum distributions by the end of this year.

Certain beneficiaries, eligible designated beneficiaries (“EDB”), are still permitted to take distributions over their life expectancy. Such beneficiaries include the plan participant’s surviving spouse and minor children, a disabled or chronically ill individual, and anyone not more than ten years younger than the plan participant.

The rules governing required distributions from inherited IRAs and other retirement plans are complicated. In addition to the above, the IRS has issued new life expectancy tables that change the calculation of required minimum distributions beginning in 2022. Consultation with your tax advisor is strongly recommended.