The SECURE Act of 2019 caused great confusion around retirement planning, but a new notice from the IRS provides some clarity. 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 rewrote the rules for inherited retirement accounts, including traditional and Roth IRAs. Most beneficiaries inheriting qualified accounts in 2020 and after are required to liquidate the asset in 10 years. The biggest confusion around the issue was created by the requirement to take annual required minimum distributions (RMDs) from the account during the 10 years. Our discussion is focused on designated beneficiaries, because those beneficiaries are the ones who have been affected the most by the SECURE Act. Generally speaking, these are individual beneficiaries that are non-spousal or not a minor child of the account owner

When the SECURE Act was issued, most experts interpreted the 10-year rule in the Act the same way as the five-year rule: No need to take an annual RMD—just liquidate the account completely by the fifth or tenth year. However, in February 2022, proposed regulations from the Treasury Department caused panic and confusion. The proposed regulations separated beneficiaries of accounts based on the account owner’s age at death. Remember, as these are the proposed regulations, they apply from the effective date of the legislation—2020! And while 2020 was a “skip year” for RMDs because of the CARES Act, 2021 and 2022 were not. This sent the retirement-planning world into a spin as it was not clear if RMDs were required for 2021 and 2022. Notice 2022-53 provides guidance on this issue.

Let’s take a step back, review the facts, then act.

• IRA owner’s age: Currently, the required beginning date (RBD) April 1 of the year following the year the IRA owner turns 72. 
   
  • If the owner had not reached the RBD age when he or she died, the account would need to be liquidated by December 31 of the year of the tenth anniversary of the owner’s death. 
    
    
  • If the owner died on or after his or her RBD and was taking RMDs, not only do the beneficiaries have to liquidate the account in 10 years, but they must take annual RMDs in years one through nine.
     
• Notice 2022-53: This notice provides some penalty relief to designated beneficiaries who did not take RMDs since the SECURE Act was implemented in 2020. Keep in mind that RMDs were waived in 2020 due to the COVID-19 pandemic. The 50% penalty is waived for RMDs not taken in 2021 and 2022. Note that Notice 2022-53 did not waive RMDs for 2021 and 2022; it simply stated that there is no penalty. If the 50% penalty was paid, the taxpayer can request a refund. The Notice indicates that the IRS plans to issue final regulations related to these RMDs that will apply no earlier than the 2023 distribution calendar year, e.g., 1/1/23.

We now have the facts of the proposed regulations, and Notice 2022-53 has given us the comfort of not being penalized for missed RMDs. 

What Now? A Three-Step Course of Action 

Remember that regulations regarding inherited RMDs are not yet final. They are, indeed, still proposed. The Notice issued by the IRS was to simply answer the “what if” questions that many financial professionals and clients had. What if the client doesn’t want to take the RMD? Should the client take it just in case?

Here are three actions to consider taking now: 

1. Reach out to clients who inherited retirement/IRA accounts after 2020, and mention there could be changes next year if they are not currently taking inherited RMDs. Addressing this issue ahead of time could prevent unnecessary chaos and allow for better planning options.
   
   
2. Plan for liquidation—just in case. If the final regulations from the Treasury Department state that inherited RMDs are required starting 2023, this does not start the 10-year clock over. The account will still need to be liquidated by 12/31 of the year of the tenth anniversary of the account owner’s death, so plan accordingly. 
   
   
3. Take this opportunity for a touchpoint with clients to discuss an income plan and how an inherited account can fit in.

Additional Resources and Links

Notice 2022-53

The SECURE Act: Key Retirement Plan Provisions

CARES Act–Get Started with These Four Questions

For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.

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This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.