New IRS regulations which significantly impact inherited IRAs

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The Secure Act was signed into law in December 2019.  One key provision of this act requires that most beneficiaries of an inherited IRA must withdraw the account balance by the end of the tenth year following year of death. There are exceptions but in general, most taxpayers must comply with the ten-year rule. Previous law would typically allow those distributions to stretch over a longer period using life expectancy tables. But for deaths beginning in year 2020, inherited IRAs are generally subject to a more rapid distribution requirement.

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Now based on recent tax law developments in 2022, it seems that rules have become even more demanding under the ten-year rule. On February 23, the IRS released new proposed regulations that incorporate all the changes brought about by the 2019 SECURE Act. There is a key clarification that has been provided by these regulations. 

The new regulations emphasize the importance of the original account owner’s “required begin date.”  If at the time of death, the original account owner had already reached the date required to begin required distribution, then the beneficiary must comply with certain distribution requirements. In other words, it matters whether the original account owner had reached the age at which minimum required distributions must be taken (currently, age 72).

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This is big news. Prior to the issuance of these regulations, it was thought that the rule was simply that the account must be emptied by the end of the tenth year following year of death. Now it seems that there must be an annual distribution.  Think about this: a lot of tax practitioners believed that the rules allowed for the flexibility to withdraw, for example, in years 8, 9 and 10. The regulations that were issued earlier this year indicate there is an annual required minimum distribution. When it comes to tax planning and estate planning, this is truly a game changer.