4 IRA Rules You Should Know From the SECURE ACT of 2020
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The SECURE ACT of 2020 set forth new rules for inherited retirement accounts (“IRAs”), but there was confusion as to when a beneficiary must take withdrawals from the IRAs. The Treasury issued Proposed Regulations on February 23, 2022, and although these regulations are not final, they provide clarity. Below is a summary of the minimum distribution requirements in the Proposed Regulations.
To determine a beneficiary’s required distributions from IRAs, you must first determine whether the decedent died before or after the date the decedent was required to take distributions. Under the SECURE ACT, the required beginning date (the “RBD”) was changed from age 70½ to age 72, with the first payment typically required by April 1st of the following year from when the participant turns age 72.
1: If the participant died before his or her RBD, and the beneficiary qualifies as a “Designated Beneficiary” but not an “Eligible Designated Beneficiary” (“EDB”):
The beneficiary may take distributions from the IRA over a 10-year period, beginning January 1st of the year after the date of death. There are no mandatory distributions in years 1-9, but the entire IRA must be distributed by the end of the calendar year, which includes the 10th anniversary of the participant’s date of death.
2: If the participant died before his or her RBD, and the beneficiary is (a) less than 10 years younger than the decedent or (b) a “disabled or chronically ill” beneficiary (as defined by the regulations as an EDB):
The beneficiary may take distributions from the IRA over a 10-year period. There are no mandatory distributions in years 1-9, but the entire IRA must be distributed by the end of the calendar year that includes the 10th anniversary of the participant’s date of death; OR
The beneficiary may take distributions over the beneficiary’s life expectancy. The IRA withdrawals are based on the beneficiary’s life expectancy the year after the participant’s date of death.
3: If the participant died after his or her RBD, and the beneficiary qualifies as a “Designated Beneficiary”:
The beneficiary must take annual distributions from the IRA over a 10-year period. There are also minimum mandatory distributions in years 1-9 based on the beneficiary’s life expectancy and the entire IRA must be distributed by the end of the calendar year which includes the 10th anniversary of the participant’s date of death.
4: If the participant died after his or her RBD, and the beneficiary is (a) less than 10 years younger than the decedent or (b) a “disabled or chronically ill” beneficiary (as defined by the regulations as an EDB):
The beneficiary may take distributions from the IRA over a 10-year period. There are mandatory distributions in years 1-9 based on the beneficiary’s life expectancy, and the entire account must be distributed by the end of the calendar year that includes the 10th anniversary of the participant’s date of death; OR
The beneficiary may take distributions over the beneficiary’s life expectancy. The IRA withdraws based on the beneficiary’s life expectancy the year after the decedent’s date of death or what would have been the decedent’s life expectancy. There is a “longer of” rule in determining the denominator in the calculation.
* Please Note: If the beneficiary of the retirement account is a Trust, further analysis is required.
* Corrective distributions should generally be made in connection with the filing of the beneficiary’s personal income tax return.
* Beneficiaries should consult their financial advisor, income tax advisor, or estate planning attorney with questions.
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