IRS Publication Answers Some Questions and Raises Others
As you know, a lot has changed since the end of 2019. In the retirement savings industry, the Setting Every Community Up for Retirement Enhancement (SECURE) Act brought significant changes to IRAs and employer-sponsored retirement plans. And the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided much needed relief to the retirement and health industries, which were struggling to cope with the coronavirus (COVID-19) pandemic.
While the latest version of IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), answered some outstanding questions brought about by these new laws, it also sparked some new questions.
Interpretation of Beneficiary 10-Year Rule
In the latest version of this publication, the IRS confirms that designated beneficiaries who are not eligible designated beneficiaries are generally subject to a 10-year payout period. The IRS indicates that beneficiaries should not use any of the distribution tables if either the 5-year rule or the 10-year rule apply. The IRS also cautions beneficiaries that if the 10-year rule applies, then any amount remaining in the IRA after December 31 of the year containing the 10th anniversary of the account owner’s death is subject to the 50 percent excess accumulation penalty tax.
This seems to validate that the 10-year rule resembles the 5-year rule and that annual minimum distributions are not required if the account is depleted by December 31 of the final year. But here’s where it gets a little complicated. The IRS also provides an example (one that has been used in previous versions of the publication) that includes a life expectancy calculation for a designated beneficiary where, presumably, one would not be required. This example raises questions as to whether an annual life expectancy payment is required or if an oversight occurred when the IRS updated the publication.
The IRS also implies in the new Publication 590-B that the 10-year rule is not an option for an eligible designated beneficiary if the account owner died on or after her required beginning date. Again, this raises questions as to whether this was a misinterpretation of the SECURE Act’s intent, or if the IRS is suggesting that the “at least as rapidly” rule will remain for such eligible designated beneficiaries, requiring life expectancy payments to be disbursed from the account if an account owner dies after her required beginning date.
Election Deadline for Eligible Designated Beneficiaries
After the SECURE Act was enacted, there were outstanding questions on deadlines for making beneficiary elections. In the publication, the IRS states that the deadline for an eligible designated beneficiary to elect a distribution option is the earlier of
December 31 of the year the beneficiary must take his first life expectancy payment, or
December 31 of the year containing the 10th anniversary year of the account owner’s death (or 5th anniversary year of the account owner’s death if applicable).
Options for Nonperson Beneficiaries
The sections of the publication addressing beneficiaries who are not individuals remain largely unchanged, confirming that pre-SECURE Act rules continue to apply to nonperson beneficiaries such as estates, charitable organizations, and nonqualified trusts. Moreover, the sections addressing the “look through” provision for trust beneficiaries also remain unchanged, although there are numerous outstanding questions on how the SECURE Act provisions apply to trust beneficiaries.
Reporting CRD Repayments
The CARES Act allowed qualified individuals to withdraw up to $100,000 in aggregate from IRAs and eligible retirement plans without paying the 10 percent early distribution penalty tax.
Qualified individuals had to take these distributions, known as coronavirus-related distributions (CRDs), on or after January 1, 2020, and before December 31, 2020. CRDs may be repaid to an IRA or eligible employer plan over a three-year period, which begins the day after the individual received the distribution. Individuals can only repay CRDs that would otherwise qualify for rollover treatment. For example, because nonspouse beneficiaries are not allowed to take a death distribution and roll it over within 60 days, they may not repay CRDs taken out of an inherited IRA or an inherited employer plan.
In the publication, the IRS specifies that a CRD repayment should be treated as a trustee-to-trustee transfer that is not included in income. This suggests that a CRD taken from one type of IRA could not be repaid to a different type of IRA, as trustee-to-trustee transfers may occur only between similar account types. For instance, a Traditional IRA CRD could not be repaid to a Roth IRA.
Future Guidance Expected
Proposed regulations addressing beneficiary and required minimum distribution rules under the SECURE Act are anticipated soon and should provide additional clarity. Visit ascensus.com for the latest information.
