Logic of New RMD Rules for Inherited IRAs
I am going to comment on the IRS’s new proposed rules for RMDs for Inherited IRAs (https://www.regulations.gov/document/IRS-2022-0003-0001). I was wondering if anyone understands the logic of having one set of RMD requirements for non-“eligible designated beneficiaries” (non-EDBs) depending on the age of the decedent. If a decedent died before the required beginning date (RBD) for their RMD (now age 72), then the beneficiary of the IRA only has to deplete the IRA within ten years (i.e., no annual RMDs for years 1-9; all remaining assets distributed in year 10). However, non-EDBs who inherit an IRA whose owner died after the RBD have to take annual RMDs. I don’t understand the logic of this. Why should the timing of inherited IRA distributions be dependent on the age of the original IRA owner? I understand why Congress did away with stretch IRAs and moved to the ten-year rule (more revenue in the short term), but this at least applied to an entire class of beneficiaries. The IRS’s proposal to split non-EDBs into two groups to determine annual RMDs just seems arbitrary, especially when the beneficiary did not have any control over when the original IRA owner died.
Permalink Submitted by William Tuttle on Mon, 2022-03-14 23:34
Trying to determine the logic of Congress is always an excercise in futility, but I will try.
First and foremost, the SECURE Act inherited retirement account changes for non-spouse beneficiaries were for revenue raising. More specifically, a “pay for” line item to offset the costs of other changes.
Secondarily to rectify an unintended consequence of the non-spouse beneficiary RMD rules.
Tax-deferred retirement accounts are a public policy to encourage people to save for their retirement.
RMDs are to ensure those tax deferrals are only for their lifetime not as a legacy for future generations.
It clearly always made sense to extend the benefit to spouses.
However, it was never really intended as a legacy non-retirement benefit for children and grandchildren.
Now as Congress is want to do the result is an unecessarily complicated mess that even the IRS is having trouble figuring out.
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-15 00:36
Sec 401(a)(9)(B) has always stated that if RMDs have begun for the participant, and the employee (IRA owner) dies, that the plan balance is to be distributed “at least as rapidly as the method used at the death of the employee”, ie life expectancy RMDs. Therefore, since the goal was for faster payouts, it did not make sense to accept no distributions whatever for the first 9 years, even though the 10th year required a full distribution. Conversely, for deaths prior to RBD, the employee was not taking any distributions, so “at least as rapidly” translated to no annual distributions until year 10. Further, this applies to ALL Roth IRAs since Roth IRAs have no RBD and therefore are not subject to any distributions until year 10. You could also argue that many beneficiaries of non Roth accounts would actually want to take some distributions in the first 9 years to have more of the total distribution taxed at lower rates than a lump sum.