What Does Ten Years Mean?

The IRS earlier this month release proposed regulations dealing with retirement plan rules after the passage of the SECURE Act in 2020.

Before 2020, persons with IRAs and retirement plans would have to start taking out a required minimum distribution (RMD) by April 1 of the year after they turn age 70 1/2. The SECURE Act changed this to age 72 (which is easier for us to remember than 70 1/2). However, if you elect to take your first distribution in the year you turn 73, you are also required to take your age 73 distribution which can kick you into a higher tax bracket.

The SECURE Act also eliminated the ability for many beneficiaries to “stretch” out inherited IRAs and retirement plans over this lifetime. Unless you are an eligible designated beneficiary, you must fully deplete the IRA by the 10th year after the death of the IRA owner (I will use IRA going forward which can also relate to retirement plan rules too).

An eligible designated beneficiary is (1) your spouse, (2) disabled or chronically ill person, (3) anyone less than 10 years younger than you, or (4) your child but only until they reach the age of majority.

All other individuals inheriting an IRA must deplete it within 10 years. Everyone assumed that the IRS would indicate that if a person had started to take their RMD and then died, that the beneficiary could wait the full 10 years and then take it all at once.

These rules also apply to ROTH IRAs. Those distributions are non-taxable, but they still have to be distributed by the 10th year after death.

However, the proposed regulations on pages 46-48 give several examples indicating that you are required to take a minimum distribution each year. The IRS last year in their publication dealing with IRAs had seem to indicate the same conclusion but then appeared to back track on that conclusion.

There was also concern as to what is the age of majority for children. Some states it is 18 and others it is 21 or can be delayed if they are in school. The regulation now says it will be age 21 for all children. This means that RMDs would be required until either age 30 or 31 when all remaining amounts must be distributed.

Remember these are only proposed regulations and there will be a lot of comments presented to Treasury before they are finalized. Most commentators believe the IRS does not have the authority to require distributions each year. But this gives you an idea on how fast you may have to take distributions out of an inherited IRA if the IRS rules become final.