IRS Proposed Rule May Affect Retirement Account Beneficiaries

 Posted on May 03, 2022 in Taxation Law

There are multiple different types of retirement accounts that a person may use to ensure that they will have the necessary financial resources later in life. These accounts can provide a number of tax benefits in addition to allowing money saved throughout a person’s career to grow significantly through well-managed investments. However, the treatment of these accounts by the IRS can sometimes become complicated, including in cases where a person dies either before or after they begin receiving distributions. Recently, the IRS issued a Proposed Rule that details the requirements that apply in these situations.

Changes to RMD Rules Under the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was implemented in December 2019, made a few updates to the rules related to required minimum distributions (RMDs) for certain types of retirement accounts, including 403(b) plans and individual retirement accounts (IRAs). One major change was an update to the required beginning date (RBD) at which a person must begin receiving distributions. For people born after July 1, 1949, the RBD has been increased from age 70 ½ to 72.

The SECURE Act also addressed situations where an account owner dies before they have received distributions of all funds in an account or plan. A person will typically name one or more beneficiaries who will receive any remaining funds, and the SECURE Act details when different types of beneficiaries will be required to take distributions from a decedent’s account.

Beneficiaries are generally grouped into one of two categories. Eligible designated beneficiaries include the decedent’s spouse, their minor children who have not yet reached the age of 21, people who have disabilities or are chronically ill, other people who are 10 years younger than the decedent or less, or certain types of trusts. Beneficiaries who do not fall into one of these categories are considered to be non-eligible designated beneficiaries.

The IRS’s Proposed Rule details the requirements that apply for beneficiaries following the death of an account owner. In cases where a person dies before reaching their RBD, eligible designated beneficiaries may receive “stretch” distributions from an account either throughout their life expectancy or during the period where they are eligible, such as until a minor beneficiary reaches the age of 21. Non-eligible designated beneficiaries will be required to follow a 10-year rule in which they must receive a full distribution of the funds in an account by the end of the 10th year after the decedent’s death.

In cases where a person dies after reaching their RBD, eligible designated beneficiaries may take distributions based on their own life expectancy, and funds must be distributed at least as rapidly as would have been required for the decedent. For non-eligible designated beneficiaries, the 10-year rule applies for when a person will be required to receive a full distribution, and a beneficiary will also be required to receive annual RMDs during this 10-year period.

Contact Our San Jose Retirement Account Tax Lawyer

While the new Proposed Rule has not yet gone into effect, it indicates how distributions from retirement accounts are likely to be handled in the future. Owners of IRAs and other accounts and beneficiaries who expect to receive distributions from these accounts will need to understand the best steps they can take to realize tax benefits from meeting required annual distributions, as well as how they can avoid penalties that may apply if the requirements are not properly met. John D. Teter Law Offices can provide guidance in these areas, and we can help address any tax-related issues that may affect account holders or beneficiaries. Contact our San Jose, CA tax law attorney at 408-866-1810 to set up a consultation and discuss these and other tax-related concerns.

Sources:

https://www.govinfo.gov/content/pkg/FR-2022-02-24/pdf/2022-02522.pdf

https://www.kitces.com/blog/irs-proposed-regulations-secure-act-rmds-eligible-designated-beneficiaries-see-through-trusts/

https://www.journalofaccountancy.com/news/2022/feb/proposed-regulations-update-rmds-secure-act-changes.html