What You Should Know About Proposed IRA Regulations


Howard Essner, JD, Managing Director, Family Wealth Advisor

The SECURE Act of 2019 included a major change to how inherited IRAs are treated. This law required many heirs of traditional and Roth IRAs whose owners died after 2019 to empty the accounts within 10 years of the owner’s death. Prior law had allowed the heir to take distributions over the heir’s life expectancy, potentially many decades. Thus, the SECURE Act greatly reduced how long the heir could enjoy tax-deferred or tax-free (for Roth IRAs) build-up and accelerated the payment of income taxes on inherited traditional IRAs.

Although there was some ambiguity in the language of the law, most advisors, including us, interpreted the law to mean that the heir could empty the IRA at any time over the 10-year period and that annual minimum distributions were not required. However, the IRS recently released proposed regulations that upends that thinking. Under the proposed rules, if an heir inherits a traditional IRA from an owner who died after their “required beginning date” (April 1 after the year that owner turned age 72), the heir must take annual distributions based off life expectancy under the old rules for each of the first nine years, and then empty the account in year 10. For example, say that an heir aged 45 inherited a traditional IRA from her father, who died at age 75. Under these new rules, the heir must take annual distributions based on her life expectancy in each of the nine years after her father’s death, and then withdraw the remainder in year 10, when she’s 55.

 Some important items to note:

  • An heir who inherits an account from an owner who died before his or her required beginning date is not subject to annual distribution requirements and can still take distributions any time over 10 years.
  • It appears that Roth IRAs are not subject to the annual distribution requirements, even if the owner died after age 72. Roth IRAs have no required distributions, so the owner has no required beginning date.
  • Not all heirs are subject to the SECURE Act changes. Spouses, an heir who is less than 10 years younger than the owner (e.g., a sibling) and disabled individuals can still use the old “stretch” rules.
  • For minor children (but not grandchildren), the 10-year period begins when the child turns 21, although some small annual distributions are required before then. At that point, the child would be subject to further annual distributions only if the parent died after the required beginning date (not likely).

What does this mean for an heir subject to this rule who inherited an IRA in 2020? A distribution could have been required in 2021 and been missed. The IRS is accepting comments on the proposal through May 25th and will issue the final regulations later this year. If the new rule is adopted, we anticipate that the final regulations will address retroactivity. We recommend that no action be taken at this time until we receive clarification.

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