By Andy Ives, CFP®, AIF®
The new SECURE Act regulations, released in late February, created a firestorm of confusion and complexity. We have addressed concerns in recent Slott Report articles and will continue to do so as issues arise. However, as of now, one question has emerged as the most popular: How do beneficiaries handle “missed” 2021 RMDs within the 10-year payout rule?
My teammate Ian Berger touched on this in his March 7 Slott Report entry, “The Most Controversial Part of the New Regulations.” Yet, this question persists. Since so many accounts are impacted, we thought it best to address this topic again and offer our opinion on how to proceed.
Background: Eligible designated beneficiaries (EDBs) are permitted to stretch inherited IRA payments over their own single life expectancy. As such, required minimum distributions (RMDs) must be taken from the account annually. (EDBs include surviving spouses; children of the IRA owner who are under age 21; disabled or chronically ill individuals; and anyone not more than 10 years younger than the IRA owner.) But many beneficiaries do not qualify as EDBs. Most of these other beneficiaries use the 10-year payout rule.
Under the 10-year rule, the entire inherited account must be emptied by the end of the 10th year after the year of death. For the past 2+ years, industry experts believed there were no annual RMDs within the 10-year window. Nevertheless, the new regulations tell us otherwise. If the original IRA owner died on or after his required beginning date (when lifetime RMDs begin), then any subsequent 10-year period for a beneficiary or successor beneficiary will require RMDs within the 10-year window.
This leads us to what has become the question du jour (and since there is a 50% penalty for missed RMDs, it is understandable why this inquiry is so prevalent): “If a beneficiary inherited in 2020 and was subject to the 10-year rule, do we have a missed 2021 RMD?”
Answer: Nobody knows.
Until the IRS provides clear guidance, what is the best way forward?
Our advice is to sit tight, for a couple of reasons. First, no one knew there were RMDs within the 10-year period, so the IRS could conceivably waive the 2021 RMD on inherited IRAs. Or, the IRS could say the 2021 RMD must be taken, and they will issue a blanket penalty waiver. (Hopefully the IRS won’t make everyone take their 2021 RMD and then also apply for an individual penalty waiver.) Second, regardless of when a person takes the 2021 RMD this year, there are no accruing daily penalties. Whether it is taken today or in December is irrelevant from a penalty perspective. If it turns out the 2021 RMD is required, withdrawing it early vs. later this year will have the same result.
So, we suggest patience for now in the hopes that the IRS will give us some guidance on how to handle ‘missed’ 2021 inherited IRA RMDs within the 10-year period.