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required minimum distributions

The New RMD Rule: What We Expected vs. What It Is

Life is full of surprises. Sometimes this is good, sometimes it’s not. When surprises come from the IRS, however, they are almost always unambiguously bad. The new required minimum distribution (RMD) rule for retirement accounts is one such example.

On February 23 the IRS issued Proposed Regulations to the Internal Revenue Code made by the SECURE Act. These new regulations were needed to amend ambiguities in legislation introduced in 2019 and so while their introduction provides welcome clarity, their content has taken estate planning professionals by surprise.

When the SECURE Act arrived, it introduced significant changes to retirement account planning. For many, the most impactful was the 10-year rule under which most non-spouse beneficiaries were required to withdraw the entirety of any inherited retirement account by the end of the tenth year after the deceased’s death (thus eliminating the previously-popular “stretch IRA” estate planning tactic). Most estate planners interpreted this to mean that such non-spousal beneficiaries would be permitted to take a lump-sum distribution after a decade had passed. Surprisingly, the new Proposed Regulations say otherwise.

The clarification issued in February indicates that when an ineligible non-spousal beneficiary inherits a retirement account, they will need to take required minimum distributions (RMDs) in years 1 through 9 after the account holder’s death. At the end of year 10 they will then be required to withdraw the entire remaining balance of the account. Notably, these rules only apply if the death occurred after the owner of the account had reached the date upon which they were required to begin taking required minimum distributions. Had they passed before this date, the 10-year rule would still apply but the beneficiary would not need to take RMDs.

If this sounds confusing, that is because it is. An example helps provide clarity.

Say, Chris, age 47 inherits an IRA from his mother who died at 77. Chris is not his mother’s spouse (thank goodness) and not a minor and so he is subject to the 10-year rule. Chris’ mom died after her RMDs kicked in (generally age 72) and so Chris is likewise required to take RMDs for the first nine years after inheriting his mother’s account and withdraw the remaining balance at the 10-year mark. Should he fail to follow this schedule, Chris will be subject to a 50% penalty on any required minimum distributions not taken.

Readers who inherited an IRA in 2020 may read the above and realize they have missed an RMD for 2021. Should this be you, it is important to reach out to an experienced estate planning attorney for advice on how to act. With luck, the IRS will waive the 50% penalty for the 2021 period but, as we have learned, surprises are possible.

To learn more about the new RMD rule or to address any other questions related to estate planning, do not hesitate to reach out to the Law Firm of Christopher W. Dumm either by calling 417-623-2062 or using the contact form on our website.

Meanwhile, for fast answers to tax questions, consider IRS2go, the official mobile app of the IRS.


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