By Ian Berger, JD
On April 14, we reported that the IRS was apparently interpreting the SECURE Act’s 10-year payout rule in a surprising way – to require annual required minimum distributions (RMDs). Now, the IRS has made it clear (without actually saying so) that its prior interpretation was a mistake.
The SECURE Act changed the payout rules for most non-spouse beneficiaries of IRA owners who die after 2019. Those beneficiaries can no longer use the stretch IRA. Instead, they are subject to a 10-year payout rule, which requires the entire IRA to be paid out within 10 years of the owner’s death.
Most everyone thought that annual RMDs would not be required under the 10-year rule. That’s the way the IRS interpreted the 5-year payout rule, which applies when an IRA owner dies before his required beginning date (RBD) without designating an individual beneficiary. Applying the 10-year rule the same way would give a beneficiary the flexibility to take out any amount (or no amount) from the inherited IRA in years 1-9, as long as she emptied the entire account by year 10.
But in a revision of Publication 590-B dated March 25, 2021, the IRS strongly hinted that it was treating the 10-year rule differently than it has treated the 5-year rule. It would require annual RMDs to be paid in years 1-9 and the remaining IRA funds to be paid out in year 10.
Many commentators believed the IRS had simply made a mistake, and that turned out to be the case. In a subsequent revision of Publication 590-B dated May 13, 2021, the Service made clear that annual RMDS aren’t required under the 10-year rule, after all:
“For example, if the owner died 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 may have cleared up that mess, but it created a new one. This involves the question of when exactly the 10-year period ends. The IRS has said that the 5-year payout period ends on December 31 of the year containing the 5th anniversary of death. Most assumed that the 10-year period would be applied the same way and, indeed, one part of the most recent Publication 590-B confirms that:
“The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death.”
But hold on. Two paragraphs later, the IRS says that the ending date of the 10-year period is different when a beneficiary receiving stretch payments dies or when a minor child receiving stretch payments reaches the age of majority:
“[I]n either of those cases, the 10-year period ends on the 10th anniversary of the beneficiary’s death or the child’s attainment of majority.”
Fortunately, this won’t be an issue for anyone until at least 2030. But we’ll let you know when it is sorted out.