Ignore This IRS Mistake on Inherited IRAs

The IRS recently issued an interpretation of the SECURE Act that surprised most, if not all, professionals who have reviewed the law.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019, contained a number of provisions related to retirement and estate planning.

One of those provisions eliminated the Stretch IRA by establishing the 10-year rule, as discussed earlier in this issue. Before the SECURE Act was en-acted, beneficiaries who inherited IRAs could choose to take only the required minimum distributions (RMDs) from the IRAs each year.

Professional advisors who read the act interpreted it as allowing the beneficiary to decide how the money was to be distributed during the 10 years.

The beneficiary could take no distributions until the end of the 10-year period or could take distributions in any pattern during the period.The planning community was shocked recently when the IRS released its 2021 revisions to IRS Publication 590-B. This is the IRS’s guide on the rules for taking distributions from IRAs.

On pages 11 and 12 of Publication 590-B, and especially in an example on page 12, the IRS indicated the SECURE Act’s 10-year rule is in addition to the old rules, not a replacement for them.

According to the publication, beneficiaries of IRAs must begin taking annual RMDs after inheriting the IRA and continue to take them each year until the IRA is fully distributed.

The IRA has to be fully distributed by the end of the 10 years, but in the meantime, the beneficiary has to take annual RMDs until the IRA is fully distributed.

The interpretation wasn’t announced or highlighted by the IRS. Instead, tax professionals discovered it after reviewing the newly revised 2021 edition of Publication 590-B.

IRA advisors seem to be unanimous in believing that the guidance in the current Publication 590-B is wrong. It conflicts with the wording of the SECURE Act.

In addition, the key language on pages 11 and 12 of Publication 590-B is contradicted in other passages in the publication.

The best explanation probably is that the IRS revised the publication in a hurry and tried to modify the previous version as little as possible while adding the changes from the SECURE Act. The revisions were done poorly, resulting in some contradictions and hard-to-understand sections.

After a number of IRA advisors publicly criticized Publication 590-B, an anonymous IRS spokesman told a MarketWatch.com reporter that the examples in the publication are incorrect. The publication will be revised at some point to accurately reflect the SECURE Act.

So, the law is what we thought it was after the SECURE Act was enacted. An IRA beneficiary has the full 10 years to distribute an inherited IRA. The distributions can be taken in any pattern the beneficiary wants, including waiting until the end of the 10 years to distribute the entire amount.

Until the IRS issues regulations or other formal guidance, there are no annual RMDs during the 10-year period.