Listen to Lawrence Letter – New Interpretation of IRA Distribution Rules
April 16, 2021
Dear Clients and Friends,
NEW INTERPRETATION OF IRA DISTRIBUTION RULES…POSSIBLY!
You may have heard that last year’s SECURE ACT, subject to certain eligible exceptions, changed the rules on how distributions must be made from INHERITED IRAs. I certainly wrote about this topic in past LISTEN TO LAWRENCE LETTERS. With this new law, we all fully understood that when your children inherit your retirement plans they must take out all the money by the end of the 10th year after your death…or they can take it out whenever they want over the 10 years, including just waiting until December 31st of the 10th year to take a distribution of the entire plan. This created simplicity, just do whatever you want but get the money out of the plan within 10 years. This law replaced the rule that whoever inherits your retirement plans could take out required minimum distributions (RMDs) over their life expectancy (known as a “stretch IRA”).
“NOT SO FAST,” says the IRS in IRS PUBLICATION 590-B (Google it if you are curious).
Now, it appears that RMDs, based on your life expectancy, MUST be paid out EACH of the 10 years, with the balance fully out by December 31st of the tenth year after your death. In other words, the RMDs during years one through nine will be what they would have been before the SECURE ACT and the RMD in year 10 will be the balance not previously distributed. This will be like a “mini stretch IRA.”
IS THIS TERRIBLE NEWS?
Not really, because RMDs tend to be small during the first 9 years. The real problem is that it is just a pain in the @*^% to have to first, remember to do it, and second, to actually calculate it and get it done. The 10-year rule was easy to understand and administer, now the IRS has brought back much of the pre-SECURE ACT complexity.
WHO IS AFFECTED BY THIS?
Since the SECURE ACT took effect on January 1, 2020, this only applies to people who died on or after that date, naming individuals (i.e., children, grandchildren) as beneficiaries. I am trying to simplify this Listen to Lawrence Letter, and yes, there are exceptions to all of this for certain “ELIGIBLE DESIGNATED BENEFICIARIES” (EDBs), but I don’t want to get into that right now. Also, remember that COVID RELIEF LEGISLATION paused all RMDs last year, so this will be the first year we have to deal with this.
ARE WE REALLY SURE THIS IS HOW IT WILL WORK?
Of course not! This was a “Publication” by the IRS and not an official “Regulation”, which is more serious and final. So, the best advice right now is that if you are subject to the ten-year rule, wait and see how things get settled and wait until later in the year to take out an RMD from an inherited IRA if it turns out to be necessary.
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