I wonder what is going on at the IRS when it comes to IRA minimum required distributions.
You may recall that prior law allowed for something
called a “stretch” IRA. The idea was
simple, but planners and advisors pushed on it so long and so hard that
Congress changed the law.
An IRA (set aside Roth IRAs for this discussion) must start
distributing at some point in time. The tax Code tells you the minimum you must
distribute. If you want more, well, that is up to you and the tax Code has
nothing further to say. The minimum
distribution uses actuarial life expectancies in its calculation. Here is an
example:
Age of IRA Owner Life Expectancy
72 27.4
73 26.5
74 25.5
75 24.6
Let’s say that you are 75 years old, and you have a million dollars in your IRA. Your minimum required distribution (MRD) would be:
$1,000,000
divided by 24.6 = $40,650
There are all kinds of ancillary rules, but let’s stay
with the big picture. You have to take out at least $40,650 from your IRA.
President Trump signed the SECURE Act in late 2019 and
upset the apple cart. The new law changed the minimum distribution rules for
everyone, except for special types of beneficiaries (such as a surviving spouse
or a disabled person).
How did the rules change?
Everybody other than the
specials has to empty the IRA in or by the 10th year following the
death.
OK.
Practitioners and advisors presumed that the 10-year
rule meant that one could skip MRDs for years 1 through 9 and then drain the
account in year 10. It might not be the most tax-efficient thing to do, but one
could.
The IRS has a publication (Publication 590-B) that
addresses IRA distributions. In March, 2021 it included an example of the new
10-year rule. The example had the beneficiary pulling MRDs in years 1 through 9
(just like before) and emptying the account in year 10.
Whoa! exclaimed the planners and advisors. It appeared
that the IRS went a different direction than they expected. There was confusion,
tension and likely some anger.
The IRS realized the firestorm it had created and
revised Publication 590-B in May with a new example. Here is what it said:
For example, if the owner dies in 2020, the beneficiary would have to fully distribute the plan by December 31, 2030. The beneficiary is allowed, but not required, to take distributions prior to that date.”
The IRS, planners and advisors were back in accord.
Now I am skimming the new Proposed Regulations. Looks
like the IRS is changing the rules again.
The Regs require one to separate the beneficiaries as
before into two classes: those exempt from the 10-year rule (the surviving
spouse, disabled individuals and so forth) and those subject to the 10-year
rule.
Add a new step: for the subject-to group and divide
them further by whether the deceased had started taking MRDs prior to death. If
the decedent had, then there is one answer. If the decedent had not, then there
is a different answer.
Let’s use an example to walk through this.
Clark (age 74) and Lois (age 69) are killed in an
accident. Their only child (Jon) inherits their IRA accounts.
Jon is not a disabled individual or any of the other
exceptions, so he will be subject to the 10-year rule.
One parent (Clark) was old enough to have started
MRDs.
The other parent (Lois) was not old enough to have
started MRDs.
Jon is going to see the effect of the proposed new
rules.
Since Lois had not started MRDs, Jon can wait until
the 10th year before withdrawing any money. There is no need for
MRDS because Lois herself had not started MRDs.
OK.
However, Clark had started MRDs. This means that Jon must
take MRDs beginning the year following Clark’s death (the same rule as before
the SECURE Act). The calculation is also the same as the old stretch IRA: Jon
can use his life expectancy to slow down the required distributions – well, until
year 10, of course.
Jon gets two layers of rules for Clark’s IRA:
· He
has to take MRDs every year, and
· He
has to empty the account on or by the 10th year following death
There is a part of me that gets it: there is some
underlying rhyme or reason to the proposed rules.
However, arbitrarily changing rules that affect
literally millions of people is not effective tax administration.
Perhaps there is something technical in the statute or
Code that mandates this result. As a tax practitioner in mid-March, this is not
my time to investigate the issue.
The IRS is accepting comments on the proposed Regulations until
May 25.
I suspect they will hear some.
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