IRS Reverses Position on SECURE Act; Creates Confusion for Beneficiaries

In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), which made numerous changes to retirement distribution rules. The most popular change was the modification to the start date for Required Minimum Distributions (“RMDs”). Prior to the Act, if you reached age 70 ½ in 2019 or earlier, you were required to take your first RMD by the April 1 following the year in which you turned 70 ½. For years beginning in 2020, the SECURE Act changed this Required Beginning Date to the April 1 following the year in which you turned 72.

A lesser-known provision in the Act shortened the time frame over which the beneficiary of a decedent’s IRA is required to withdraw funds from either an IRA or 401(k) account. Prior to the Act, many beneficiaries were eligible to use their own life expectancy to draw out funds from these inherited accounts. The Act changed the rules for these inherited accounts from decedents who passed away in 2020 or later to limit the distribution period for most non-spouse beneficiaries to no more than ten years.

The IRS stated in a May 2021 version of Publication 590-B that the law did not require annual distributions over the 10-year period. Instead, the only requirement was that the funds needed to be fully withdrawn by no later than the 10th year.

However, in Proposed Regulations issued on February 24, 2022, the IRS reversed course and interpreted the rules as follows:

• If a decedent passed away after their Required Beginning Date, a beneficiary of those funds must take annual distributions of inherited funds over the 10-year period beginning the year after the decedent’s death.
• If the decedent passed away before their Required Beginning Date, the beneficiary does not have to take annual distributions and can wait ten years to withdraw the entire account.

It is important to note that there are no Required Minimum Distribution dates for ROTH IRAs or ROTH 401ks. As a result, ROTH IRA and ROTH 401k beneficiaries are not subject to these reinterpreted annual distribution rules.

These Proposed Regulations potentially create problems for beneficiaries who inherited retirement funds in 2020. While the old rules did not require a mandatory distribution, the new rules would have required a beneficiary to take a distribution starting in 2021. The conservative approach to this issue is to wait until the end of 2022 to make a decision regarding any distributions required for both 2021 and 2022. This will provide beneficiaries with enough time to see if the IRS will revise the rules again or provide relief for 2021.

If you have any additional questions on the SECURE Act or related amendments, please reach out to your Citrin Cooperman advisor or Ronald Hegt at rhegt@citrincooperman.com.