New IRS Regulations Applicable to SECURE Act

I last posted about the SECURE Act a year ago. (2/28/21, 3/8/21 and 3/14/21)  This law was passed by Congress at the end of 2019 and it included significant changes concerning retirement accounts, including IRAs and employer sponsored tax deferred accounts such as 401ks.

The law was mostly negative although it did raise the required minimum distribution date from 70 and 1/2 to 72, meaning that account owners do not have to begin withdrawing funds until they are age 72.  This was a small consolation prize because the law severely limited the ability to continue tax deferral status to beneficiaries at death by allowing them to stretch out the timeline under which they must withdraw these funds, what is known as “stretch” provisions.

The new law left some questions unanswered – or at least created ambiguity.  Last month the IRS announced proposed regulations that will take effect as of January 1, 2022, although they are not yet final and could change.  As with anything put out by the IRS, these proposals are quite technical and not an easy read but there are some important takeaways for anyone with retirement accounts.

The SECURE Act requires most retirement accounts to be withdrawn much faster than was the case before the law was passed, for beneficiaries receiving these accounts at the death of the original account owner.  With some limited exceptions, the balances in these accounts must be withdrawn within 10 years, what the IRS calls the “Outer Limit Year”.  This 10 year period works the same as the 5 year rule which applies to non designated beneficiaries such as where the account owner’s estate is the beneficiary.

The new 10 year period, however, isn’t uniformly applied.  There are still different outcomes, depending on whether the retirement account owner died before or after his/her required beginning date (RBD, which will be either 70 and 1/2 or 72).

Let’s first look at the surviving spouse as the designated beneficiary. If the account owner dies before his/her RBD, the spouse can stretch the distributions over his/her life expectancy.  The outer limit year in this case is the 10th year after the spouse’s death or the final year of the life expectancy whichever occurs earlier.  

If the account owner dies after his/her RBD, however, it is a bit more complicated.  The surviving spouse can choose to make required minimum distributions over his/her life expectancy or the deceased spouse’s life expectancy.  The outer limit year during which everything must be distributed, however, is the earliest of the final year of either of these life expectancy options or the 10th anniversary of the surviving spouse’s death.

Next week I’ll review the what the proposed regulations say about minor children and disabled individuals who are named as retirement account beneficiaries.