Separate accounts rule

Submitted by Sten Lindquist on Wed, 2022-12-14 19:13

IRA owner dies post RBD in 2021 with 4 beneficiaries. Three of them are EBDs (not more than 10 years younger) and 1 is a designated beneficiary. Only one beneficiary (an EDB) has been located and has created a separate inherited IRA account. Two beneficiaries are missing and one is deceased. Do all beneficiaries need to create separate accounts by 12/31/22 in order for the EDB with a separate account to be able to stretch over his life?



Submitted by Alan - IRA critic on Wed, 2022-12-14 21:25

  • I suspect that beneficiaries who establish timely separate accounts have proceeded for years in taking RMDs using their own LE without looking back to determine if ALL the beneficiaries met the deadline. Pundits and the IRS seem to avoid this question, and due to lack of IRS oversight for beneficiary RMDs we don’t know what their opinion is. 
  • Separate account rules under 1.401(a)(9)-8 were written for qualified plans, and are not clear on this issue. Pub 590 B under “multiple individual beneficiaries” states that if each beneficiary does not create timely separate accounts, the shortest LE applies. This comes closest to a restrictive “all or none” rule.
  • Per the Secure Act, this consequence of any one beneficiary missing the deadline has changed from all of them locked to the shortest LE, to EDBs ending up with the 10 year rule and losing EDB treatment. 
  • Another issue to consider here. If any of these beneficiaries is older than the decedent and as an EDB would be able to use the decedent’s longer LE, that EDB would have to track two LEs – that of the decedent for the annual RMDs and also their own LE, since when their divisor shrinks to 1.0 or less, a lump sum distribution is required. It’s possible that the 10 year rule triggered by the separate account failures would turn out better for this EDB. 

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