Whenever you're dealing with inherited IRAs, it is important to remember that you have a high probability of doing something wrong. In the realm of individual taxation, I'm convinced the rules covering inherited IRAs are more complicated than any other issue. And in typical fashion the IRS has proposed making the rules even more complicated.
Secure Act Changed Rules for Inherited IRAs
The SECURE Act became law in 2019 and it significantly changed retirement accounts in general. One area of change is the treatment of inherited IRAs. Under old law most people who inherited an IRA could stretch the withdrawals over their expected lifespan. The SECURE Act changed that, and said, in most cases (spouses are one notable exception), IRAs inherited in or after 2020 must be empty in 10 years. The consensus was that this meant that the person who inherited the IRA could wait until year 10 and take the entire amount out of the IRA (of course he or she could also take funds out earlier). In fact, the IRS Pub covering inherited IRAs was changed to reflect this interpretation.
Enter IRS Regulations
The IRS writes regulations to implement the Internal Revenue Code (IRC). And like most government regulations, there is an approval process, including public comment, that the proposed regulation must go through prior to becoming a regulation. The IRS proposed regulations covering the SECURE Act earlier this year and they were a surprise to many of us. This is what the proposed regulations say for inherited IRAs that don't meet one of the exceptions
- If the IRA owner dies after his or her Required Beginning Date (RBD. Age 72 as a result of the SECURE Act) the person who inherits the IRA must take a Required Minimum Distribution (RMD), based on his or her age, for the first 9 years after death and empty the account out in year 10. Of course, larger distributions are allowed.
- If the IRA owner dies before the RBD, then the account just has to be empty by the end of year 10. There are no RMDs.
Public comment on the regulations was completed in June.
What to Make of It?
First of all, proposed regulations aren't binding. So, until the regs are finalized you're not required to do anything. But...the regulation, when finalized, could apply back to the effective date of the law. I'm hoping the IRS has more sense than that and they provide relief for those who acted in good faith by following the IRS Publication. With that said, there is long-standing precedent in the courts that IRS Publications are not binding on the IRS, if the Publication conflicts with the language of the law. If you inherited an IRA in 2020 (the first year the law applied), I don't think I'd do anything with your 2021 tax return...yet. Wait and see if the IRS provides relief. If you inherited an IRA in 2021 or 2020, I'd keep an ear to the ground on this issue and see if you need to take an RMD this year.
Military Finances are Different
While this issue pertains to anyone who inherits an IRA there are a lot of things (like SBP, VA Disability Compensation, State taxation of your military pension) that pertain only to active and retired military members. If you're an Active or Retired Senior Military Officer or NCO, we think you should work with a specialist. If you'd like to hear about how we do things, use the button below to schedule a free initial consultation.
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