IRS Guidance on 10-Year Payout Rule for Inherited IRAs Causes Confusion (and Correction)

A recent IRS publication about distributions from inherited IRAs – Publication 590-B – inadvertently caused consternation among financial advisors due to incorrect examples that suggested designated beneficiaries must take required minimum distributions (RMDs) in each of the 10 years following the death of the grantor.

In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) changed the way that beneficiaries of inherited IRAs are allowed to withdraw assets. Prior to the SECURE Act, beneficiaries were allowed to stretch their distributions over their lifetimes; they now have until the end of the 10th year from the grantor’s death to draw down the account. 

When the IRS released Publication 590-B, examples for designated beneficiaries of an inherited IRA indicated that these beneficiaries must take RMDs each year. The IRS has now stated that the examples were incorrect, and that the agency plans to revise the publication soon. 

The SECURE Act made a number of changes to retirement accounts, including the creation of another class of beneficiaries: eligible designated beneficiaries. These include:

  • A spouse, who can treat the IRA as an inherited IRA instead of as their own account;
  • A beneficiary who is disabled or chronically ill; 
  • A beneficiary who is not more than 10 years younger than the account holder
  • A minor child of the account holder (once they have reached the age of majority, they are no longer considered as an eligible designated beneficiary); and
  • Certain trusts.

Eligible designated beneficiaries may choose either the 10-year-rule or take RMDs based on the single life expectancy table.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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