The IRS is Taking Some of Your SECURE-ity Away

When Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), it changed the rules regarding distributions from inherited IRAs and other qualified plans.

In particular, with exceptions for surviving spouses, minors and certain other specific classes of beneficiaries, all inherited accounts now must be distributed within 10 years of the decedent’s death –instead of the previous rule which allowed certain accounts to be paid out over the beneficiary’s life expectancy.

Although this reduced the tax planning flexibility of a beneficiary, it was generally assumed by estate planners that, at a minimum, if you so desired, you could take the funds at your discretion within the 10-year period. For example, you could time withdrawals for years in which your other income was low or wait until day 365 of year 10 to make the taxable withdrawal.

However, earlier this year the Treasury Department’s proposed regulations changed this. Under these regulations not only must you take the distributions “within” 10 years, but you also have to take them “over” 10 years. Essentially, the entire account must be drawn down in 10 roughly equal annual installments.

While a beneficiary can still accelerate withdrawals, these regulations have been greeted by an inordinate number of public comments, with strong objections voiced by tax professionals. However, it is unlikely that the Treasury will change anything when the regulations become final late this year or in early 2023.

Accordingly, if you have started to take distributions from an inherited IRA over the last two years, check with your tax professional to make sure that you are in compliance with these temporary regulations.

The Treasury says that these regulations will be applied retroactively, so interest and penalties could result, even if you were doing what the statute appears to say you could do prior to the change.

Robert Kaufman is a principal at Fischel Kahn focusing on estate planning and the administration, taxation and litigation of estates and trusts. He can be reached at rkaufman@fischelkahn.com.