It has been more than two years since Congress passed the Securing a Strong Retirement Act, known as the SECURE Act, which radically changed some of the retirement plan distribution rules. During those two years, many questions have been raised about how the new laws should be interpreted.
Finally, on February 23, 2022, the IRS issued guidance in the form of Proposed Regulations. These Proposed Regulations have been sent out for comment and will not be finalized until comments are received and reviewed. Following are some of the unexpected interpretations of the new law that appear in those regulations.
NOTE: The IRS might change the Proposed Regulations before finalizing them. But for now, they provide insight into the current thinking of the IRS on key issues.
The most significant and surprising change concerns the 10-year rule as it applies to inherited retirement plans. Before these Proposed Regulations were issued, tax practitioners believed that designated beneficiaries who were subject to the 10-year rule would not be required to take annual distributions. Instead, it was thought that designated beneficiaries could take distributions in any amounts over the 10-year period (or forgo them entirely), as long as the assets of the account were entirely distributed by the end of the 10-year period.
The Proposed Regulations seek to clarify that only designated beneficiaries of retirement plan owners who died before their required beginning date will have that option.
Designated beneficiaries of retirement plan owners who died on or after their required beginning date must take at least a minimum annual distribution (according to a formula) during the 10-year period and then distribute whatever remains at the end of the 10-year period.
In general, there are five categories of eligible designated beneficiary, or EDB, including:
The Proposed Regulations simplify the test for when a minor child has reached the age of majority. Now, for purposes of the required distribution rules, a minor child is simply one who has not yet reached the age of 21, regardless of whether or not the age of majority is different in the taxpayer's state.
In addition, the Proposed Regulations clarify existing definitions of disabled and chronically ill individuals, and also add a safe harbor definition of a disabled individual.
Trusts can be complicated. For years, the IRS has been called upon to rule on whether or not a trust beneficiary qualifies as a designated beneficiary (or more recently, an eligible designated beneficiary). The Proposed Regulations simplify the determination of which beneficiary's life must be used to calculate required distributions, and which remainder or contingent beneficiaries may be disregarded. After the IRS publishes Final Regulations, these rules will be explained in the next edition of Nolo's book IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out, by John Suttle and Twila Slesnick.
Effective date: February 23, 2022