Attention clients!  Attention those of you who inherited an IRA or 401(k)- even if you are not our clients!  (sniff, sniff)

The IRS has re-analyzed (sic) the SECURE Act, the 2019 retirement law.  And, in so doing, it has come up with an interpretation that most of us would not expect.

Prior to this interpretation, a non-spouse beneficiary could inherit the IRA or 401(k) and keep it active during his or her lifetime, only taking RMD (required minimum distributions).  These were known as “stretch-IRA’s”-because the payments could be stretched out for years.

Except if you read the SECURE Act carefully, you would recognize that Congress eliminated the stretch for 2020 and beyond.  (Note:  Payment from IRA’s are taxable income- this means the IRS gets the tax bite so much sooner.)

Well, not quite.  Congress did not kill the stretch for some “special” beneficiaries- those with disabilities or close in age to the decedent.  These folks could still stretch our their payments.   And, the IRS issued Publication 590-B (IRA Distributions) which intimated that RMDS would be paid in the first nine years, with the rest of the IRA to be distributed in year 10.

Also, if a child (NOT a grandchild) inherits an IRA and has not yet reached the age of majority (no, we are not talking about 18- but 21), then no withdrawals need to start until the age of 21 is attained- and then the 10 year clock to draining the account begins.

Here comes the rug pull.  You might tumble to the floor, if you are not careful.

The IRS now feels that if we inherited that IRA or 401(k) from someone who had passed the required beginning distribution date (remember, that now means the age of 72)-  or had been taking out the RMD’s, we are to continue taking out RMDs in years 1 through 9.  And, then withdraw the balance of the account in year 10.

Whoa, Nelly!   We got ourselves a heck of  tax bill, don’t we?

And, if we had an RMD in 2021 for which we’ve just been notified (due to the new IRS interpretation),  we need to take TWO payments in 2022 (by the due date of their tax return) and file Form 5329 requesting a waiver of the 50% penalty.  (Unless we are willing to wait to see if the IRS modifies the final regs to provide relief for those of us who inherited the IRAs in 2020 and were not aware of this new interpretation of theirs.  If they don’t, then that penalty looms pretty large.)

(Note:  RothIRAs  do not have RMD’s.  Which means we have until year 10 to clear out the account.)

While we are at it, we should really consider upping our distributions in years 1 through 9.  Not sticking to the RMD.  Because that year 10 withdrawal  is going to create a doozy of a tax bill.