How to Feel More Secure in Your Knowledge of the SECURE Act

BY: Deidre S. Waltz, CFP®, CIMA®
Vice President, Relationship Manager
(405) 608-8002

The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was signed into law on December 20, 2019. Frustratingly, it’s been three years since then, and taxpayers still do not have a definitive answer on how inherited IRA distributions should be taken.

Among other things, the SECURE Act changed inherited IRA required minimum distributions (RMD) rules so that “designated IRA beneficiaries” could no longer “stretch” the required minimum distributions over their life expectancy. Designated beneficiaries are basically those who are not “eligible designated beneficiaries,” which are 1) the IRA owner’s surviving spouse, 2) minor children, 3) disabled (under IRC Sec. 72(m)7)), 4) chronically ill individuals (under IRS Sec. 7702B9c)(2), with a certification that the illness is lengthy, 5) individuals who are more than 10 years younger than the IRA owner, or 6) subject to the RMD rules in effect before January 1, 2020.

Why the SECURE Act has caused confusion
Under the SECURE Act, designated beneficiaries (e.g., non-spouses) of IRAs inherited after 2019 are required to take the entire IRA balance within 10 years. This is where the confusion begins. Most taxpayers (and their advisors) assumed this meant there would be no required distributions in years 1 through 9, with a 100% RMD in year 10. Adding to the confusion, in 2020, the first year under the new SECURE Act rules, the Coronavirus Aid Relief and Economic Security (CARES) Act waived required minimum distributions from all qualified defined contribution retirement plans (including IRA’s).

Without getting too much into the weeds, the SECURE Act did not change the “at least as rapidly as” rule, which requires the remaining amount of the IRA to be distributed at least as rapidly as the method being used before the IRA owner’s death.  This had tax professionals debating whether this rule applied to the new SECURE Act rules.  No guidance was issued during 2021, so most taxpayers (and their advisors) assumed their original interpretation of the Act was correct, in that no distributions would be required during years 1 through 9.

Further inherited IRA regulations lead to more questions
The IRS issued proposed (post-SECURE Act) RMD regulations in February 2022, stating annual RMDs would be required under the 10-year rule if the IRA owner died on or after his or her required beginning date.   This had tax professionals questioning whether their clients would be penalized for not taking their RMDs during 2021, after having been advised it was not required.

In October 2022, the IRS issued Notice 2022-53 providing some relief in the form of a waiver of the 50% excise tax that could otherwise be imposed on certain beneficiaries of IRAs who fail to take their required minimum distributions.  Unfortunately, this Notice did not waive or eliminate the RMDs for 2021 and 2020.  Designated beneficiaries may still be required to withdraw those RMDs; they just won’t be penalized for not taking them during 2021 or 2022.

The window for action is closing
The proposed regulations will not take effect until at least 2023.  Designated beneficiaries of IRAs inherited after 2019, where the original owner was already in RMD status, may need to take their RMD amounts for 2021, 2022 and 2023 before December 31, 2023.  It is possible the IRS may provide additional relief or propose other regulations before then.  Taxpayers should consult their tax professionals before December 31 of this year to develop a withdrawal strategy that best fits their individual tax situation.