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1. A new 10-year rule for most non-spouse beneficiaries.

Retirement Planning > Spending in Retirement > Required Minimum Distributions

Debate: Did the IRS Get It Right on Secure Act RMD Rules?

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As most clients know by now, the IRS has released proposed regulations interpreting the Secure Act changes to the required minimum distribution (RMD) rules effective beginning in 2020. 

In a surprise move, the regulations require most designated beneficiaries to take annual RMDs within the new 10-year distribution period if the original account owner died on or after their required beginning date (the Secure Act is silent regarding whether annual distributions are required). Clients who inherited accounts from owners who died before their required beginning dates will not be required to take annual RMDs during the 10-year distribution period. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the IRS’ interpretation of the 10-year deferral window.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: One major purpose of the Secure Act changes was to ensure that IRAs and retirement accounts are used for their intended purpose: saving to ensure sufficient income in retirement. Wealthy clients are often able to use these vehicles as estate planning options, and under the old rules, could continue to defer tax liability for decades after they had died. 

Byrnes: The IRS’ interpretation under the proposed regulations is much different than anyone expected. The letter of the law seems to indicate that noneligible designated beneficiaries would still be entitled to a 10-year stretch tax deferral even post-Secure Act. It doesn’t seem that the new interpretation is what Congress intended — or what the IRS indicated would be the case in their own publications prior to the release of these regs. The back-and-forth does nothing but create headaches for financial professionals and their clients.

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Bloink: Under the new proposed regulations, if a retirement account were already in pay status, the beneficiary would be required to continue taking annual distributions in years one through 10. In other words, they’re required to continue using the system that the original account owner was already using — so it shouldn’t create undue confusion among beneficiaries. 

Byrnes: The new regulations reinstate annual RMDs for nearly all IRA beneficiaries. Now, clients are left with the uncertainty of what to do if they inherited an IRA post-Secure Act, pre-regulations (and we’ve still been given no indication about whether relief for 2020 and 2021 will be available).

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Bloink: The new interpretation ensures that any remaining inherited funds are distributed in a manner that’s more in line with the original account owner’s life expectancy (since the owner would have already reached the required beginning date prior to death). I don’t see anything unfair about that. Sure, the “stretch” treatment has been sharply limited, but it hasn’t been eliminated entirely — so beneficiaries are still receiving a tax benefit by not being required to distribute the funds in an immediate, taxable lump sum.

Byrnes: These new regulations overly complicate an already complex area of the law — and an area of law that affects nearly every client at some point in life. We should be working to create a tax code that can be understood by the average American. We also should want a tax code that allows at least some flexibility or transition relief as we move from the old rules to the new.

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