Inherited Retirement Plans

Answer:  The key word is proposed. These past few years it’s been a challenge to keep up with all the changes and new regulations in all aspects of our lives. Yes, you’re correct, in February 2022 the IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules. Unless these proposals are amended, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period. Account owners and their beneficiaries may want to become familiar with these new interpretations and how they might be affected by them if they go into effect.

In 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called 10-year rule generally requires inherited retirement accounts to be emptied within 10 years of the original owner’s death, with some exceptions. This reduces the ability of most beneficiaries to spread out or “stretch” distributions from an inherited defined contribution plan or IRA.

If you own a traditional IRA or participate in a 401(k), you must generally start taking RMDs for the year you reach 72 (age 70 1/2 if born before July 1, 1949). No RMDs are required from a ROTH IRA during your lifetime although beneficiaries are subject to inherited retirement account rules. The penalty for failing to take RMDs is generally a hefty 50% of the unmet RMD amount. 

The SECURE Act does still allow certain beneficiaries to continue “stretch” distribution to some extent. The eligible designated beneficiaries (EDBs) include your surviving spouse, minor children, anyone not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. Once an EDB dies or when a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years after your death.

The bottom line is that if your beneficiary is not an EDB, the entire account must be distributed in the tenth year. If you die before your RMD starting date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.

If you die on or after the date your RMDs begin, annual distributions based on the designated beneficiary’s remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.

If your designated beneficiary is a spouse, there are special rules. The 10-year rule typically has no effect until after the death of your spouse, or possibly until the death of your spouse’s designated beneficiary.

Life expectancy for RMDs after your death are typically calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year for life expectancy reduced by one for each subsequent year. At the end of the appropriate 10-year period, any meaning balance must be distributed.

All of this reminds me of our granddaughter’s first day of school when she was in first grade, many years ago. When we asked how her day was, the response was “it’s complicated Yaya!” The rules concerning distributions from inherited retirement accounts are indeed complicated. The consequences of making a mistake can be severe. Always talk to your tax professional to understand how the rules and proposed new regulations may apply to your individual situation. Stay focused and plan accordingly.

The opinions expressed are those of the writer as of May 15, 2022, but not necessarily those of Raymond James and Associates, and are subject to change at any time. This material is provided for educational and informational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. All investments are subject to risk, including loss.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.