The SECURE Act significantly reduced the benefit of the stretch IRA by requiring most beneficiaries to distribute the entire inherited IRA over 10 years. For most beneficiaries, the Act does not specify any rate at which distributions must be taken, only that the account must be entirely distributed by the end of the tenth calendar year following the owner’s death.
An exception exists for eligible designated beneficiaries allowing them to base their withdrawals from the inherited IRA based on their life expectancy. They include the following.
- Surviving spouses
- Minor children of decedents, but only while they are minors
- Disabled persons
- Chronically ill persons
- Persons not more than 10 years younger than the decedent
On February 23, 2022, the IRS released proposed regulations that require the distribution to be made:
“at least as rapidly as under the distribution method being used under section 401(a)(9)(A)(ii) as of the date of the employee’s death”.
The proposed regulation refers to Treas. Reg. §1.401(a)(9)-5 for more information about the distribution period, which proposes using the beneficiary’s remaining life expectancy, provided that the original IRA owner died after their required beginning date and had a shorter life expectancy at death than the beneficiary.
Although these are proposed regulations, you are now advised as a clients of the possibility of RMDs from inherited IRAs at rates based on their life expectancies. If implemented by the IRS, this interpretation may result in elderly taxpayers having additional taxable income if they have inherited traditional IRAs. If they are beneficiaries of IRAs owned by someone who died in 2020, the possibility of penalties may exist for RMDs not taken during 2021.