IRA owners are allowed to nominate anyone they wish to receive shares separate from their IRAs. Before January 1, each of these beneficiaries had to make a minimum distribution each year to use the share of the ERI on their life expectancy. Now, with the proposed regulations, the IRS has returned to its old position. This puts people who have recently inherited IRAs in a dilemma. First, how many of them seek advice from a tax professional each year to find out that the rules have changed – again? If they do not make the required payments, there is a severe penalty of 50% on the amount that should have been withdrawn. Commentators are already intervening. Some say the IRS is simply wrong: „These rules violate the law as well as previous final regulations.” Others are calling for relief: „When the currently proposed rules come into effect, at least one safe harbor exemption should be included.” There`s a lot more to the new regulations: a new definition of a minor (21, even though your state says 18) and new rules for IRAs left to trusts. The Department of Finance will accept comments until May 25, 2022. If a disabled beneficiary, a chronically ill beneficiary or a beneficiary less than 10 years younger than the plan member is the only designated beneficiary of a separate part of the ERI/plan – in a bridge trust or directly – the required annual payment is based on the life expectancy of the beneficiary. A bridge trust requires the trustee to distribute all of the trust`s income each year, including the minimum distributions required by the ERI. There is a clear benefit to disabled and chronically ill inherited IRA beneficiaries if they can defer the income tax payable of an IRA by extending the minimum required distributions over 10 years and also benefit from greater protection of IRAs from creditors and bankruptcy.
As previously mentioned, the SECURE Act makes no direct changes to the post-death distribution rules for unnamed beneficiaries such as charities, estates, and opaque trusts. Pension plan members and IRA holders, including SEP IRA and SIMPLE IRA owners, are responsible for withdrawing the correct amount of MSY from their accounts on time each year, and they face heavy penalties for not taking RMD. If you are the surviving spouse and sole beneficiary of your deceased spouse`s ERI, you can choose to be treated as the owner of the ERI rather than a beneficiary. By choosing to be treated as an owner, you determine the minimum payment required as if you were the owner, starting in the year you choose, or considered the owner. Profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. RMD rules also apply to traditional IRAs and IRA-based plans such as SEP, SARSEPs, and simple IRAs. In particular, with the exception of last year, there are no requirements for distributions that must be made within the 10-year period. This would allow an ineligible designated beneficiary to choose to make distributions over the entire 10-year period in order to distribute the income from the legacy account as evenly as possible. The story here is that you could appoint a non-spouse beneficiary, say your daughter, to inherit your IRA, and if you died, she could keep the IRA for her life and take the required minimum payments set each year by the Internal Revenue Service. It was known as an extended IRA – payments could be stretched for years. This decades-long tax deferral was worth a lot. But the track was too good to be true.
In the SECURE Act, Congress eliminated the path for hereditary IRAs from deaths starting in 2020 as a source of revenue: traditional IRA payments are taxable income, so the Treasury would receive its taxes sooner. The greatest impact of the post-death distribution rule changes made by the SECURE Act will be felt by ineligible designated beneficiaries who are not eligible for the list of eligible designated beneficiaries and are therefore no longer allowed to expand (unlike their eligible designated beneficiary brothers). In particular, it may change not only the rules for designated beneficiaries who are in „ineligible status,” but also some trusts. Under the SECURE Act, a special needs trust must be established as an accumulation fund to prevent pension benefits from being paid directly to the beneficiary and depriving the beneficiary of public assistance. An eligible beneficiary with special needs must meet the legal test of the SECURE Act for a person with a disability or chronic illness and be the only beneficiary of the trust to meet the long-term deferral requirements and avoid the 10-year payment rule. However, it should be noted that while the definition of a person with a disability and a chronic illness in the SECURE Act is similar to the requirements for social assistance because of a disability, it is not identical. A person does not have to have a permanent disability to be eligible for public assistance, only to be completely disabled, and is therefore subject to periodic review of that disability and may be considered recovered. If a trust is the designated beneficiary of an IRA upon the death of the plan member, it must still meet the designated beneficiary requirements under the old rules, and it can divide the IRA into separate share trusts, but the „life expectancy” rule no longer applies without the same exceptions.
Now, the 10-year rule applies and requires that all ERI assets be distributed by the ERI/Plan to trusts no later than December 31 of the 10th calendar year following the death of the plan member. The Setting Every Community Up For Retirement Enhancement Act, passed in December 2019, introduced a host of substantial updates to long-standing rules on retirement accounts. One of the most notable changes was the elimination (with a few exceptions) of the „stretched” provision for non-spouse beneficiaries of legacy retirement accounts. As before SECURE, beneficiaries of legacy retirement accounts could „stretch” distributions based on their own life expectancy, but now most non-spouse beneficiaries must use their accounts within ten years of the death of the original owner. (Unlike RDGs, however, the new 10-year rule provides some flexibility with respect to the timing of distributions, as no annual withdrawals are required – funds can be withdrawn from any amount and at any time during the 10-year period – as long as the full amount is withdrawn before the end of the 10-year period.) On the other hand, it would be perfectly reasonable for the IRS to interpret the intent of Congress of the provision to mean „no more than 10 younger calendar years,” as such an interpretation would be consistent with other required minimum distribution rules (which are generally based on the calendar year and are not tied to the exact mid-year date or milestone).