Tax Update: New Proposed Rules Affecting Required Minimum Distributions

March 31, 2022

Tax Update: New Proposed Rules Affecting Required Minimum Distributions

IRS issues proposed regulations for retirement plan rules in the 2020 SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December 2019. After it became effective on January 1, 2020, it created changes in long-term retirement savings and financially impacted most taxpayers.

On February 24, 2022 the Internal Revenue Service (IRS) issued proposed regulations including comprehensive revisions to the required minimum distribution (RMD) rules that implement changes made by the SECURE Act.

Notable changes to the RMD rules
The SECURE Act made the following notable changes to the RMD rules:

  • Increased the required beginning date (RBD) to age 72. This increases the age at which retirement savers must begin to receive distributions from their retirement benefits from April 1 following the year in which the participant reaches age 70½ to April 1 following the year in which the individual reaches age 72. It is effective for individuals born after June 30, 1949, and
  • Limiting the ability to stretch distributions from inherited benefits more than 10 years. For defined contribution plans, this regulation removed the ability for certain beneficiaries of a deceased participant to stretch distributions over the lifetime of the beneficiary. Instead, it now requires distributions within 10 years of the participant’s death to designated beneficiaries that do not qualify as eligible designated beneficiaries. An eligible designated beneficiary is generally a surviving spouse, the retirement plan participant’s child NOT reaching the age of majority, a disabled or chronically ill individual, and an individual not more than 10 years younger than the retirement plan participant

The proposed regulations provide some clarification but also raise some questions. The following are significant clarifications in the proposed regulations:

  • Birthdate rule for revised RBD
    • The proposed regulations encore a simple birthdate rule. If the participant’s birthdate is prior to July 1, 1949 then the age cutoff is 70½. If the birthdate is on or after July 1, 1949 the age is 72.
  • Child’s age for determining when reached “majority”
    • The proposed regulations provide important clarification for determining if a child is an “eligible designated beneficiary.” The proposed regulations apply an age cutoff of 21 years old instead of the age of 18, which many had assumed based on the age of majority in most states.
  • Change affecting the timing of RMD from inherited plans
    • When a participant dies after having commenced RMDs in a defined contribution plan, including IRAs, and there is a beneficiary who is not an eligible designated beneficiary as defined above, then the proposed regulations require both:
      • Continued periodic distributions to the beneficiary following the participant’s death.
      • Full distribution of the account by the tenth year following the participant’s death.

Important clarification of the effect on inherited IRAs
The timing of RMDs from inherited plans is important. Here is further explanation by examples.
Consider that if someone dies in 2022, the inheritor will have to fully deplete the account by December 31, 2032 but may elect to take no distributions in 2023-2031. If applicable, you must make sure that the owner’s RMD for 2022 was made during their lifetime. If not, this must happen in 2022.

The proposed regulations indicate that if the person who died had started their required minimum distributions, then the heirs must take a distribution each year and then fully deplete it in the tenth year. However, if the person who died had not started their RMD, then the heirs are not required to take anything out for nine years and then fully deplete it in year 10.

Here is an example of how this might work: Husband and Wife pass away in 2022 and both have IRAs. Husband is already taking RMDs from his IRA. Husband already took his 2022 RMD before he passed away. Wife is younger and is not taking RMDs from her IRA. Their only son inherits both IRAs. Since Husband is taking a required minimum distribution each year, Son must take a distribution in 2023 from the IRA he inherited from Husband based on Son’s life expectancy. Son must then take a required minimum distribution in years 2024-2031. The balance of this inherited IRA must be taken in 2032. Since Wife is not subject to the RMD rules, Son, if he prefers, can wait and fully deplete the IRA he inherited from Wife until 2032.

Applicability dates and likely changes from comments from interested parties
The IRS proposes an effective date for the proposed regulations of January 1, 2022. Taxpayers are entitled to rely on the proposed regulations now and for distributions in 2021. The IRS is soliciting comments, which are due by May 25, 2022, on the proposed regulations generally. A public hearing is expected on June 15, 2022.

Since these are proposed regulations and the IRS expects to receive comments from interested parties, including the American Institute of CPAs (which has already submitted comments), it is likely that the regulations will be different when finalized.

We will continue to monitor these regulations, subscribe to our blog in the box above for notifications. For additional information contact the author at Article provided by Deane Markle.