SECURE Act: “We Don’t Know Yet”

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Gradually, the IRS is clarifying sections of the SECURE Act that require further guidance. In Notice 2020-68, released September 2, the IRS addressed a number of items in a Q&A format. For example, “Is a financial institution that serves as trustee, issuer, or custodian for an IRA required to accept post-age 70½ contributions in 2020 or subsequent taxable years?” Surprisingly, the answer is No. Financial institutions do not have to accept post-age 70 ½ IRA contributions even though such contributions are permitted by the SECURE Act. (Why an institution would refuse these deposits is beyond me.)

Another question in the Notice was, “May an individual offset the amount of required minimum distributions (RMDs) for a taxable year from the individual’s IRA by the amount of post-age 70½ contributions for the same taxable year?” Meaning, if a person makes a post-age 70 ½ IRA contribution, can they reduce their RMD in that year by the same amount? This answer is also No. As Notice 2020-68 clearly states, “Contributions and distributions are each separate transactions and are independently reported by the financial institution to the IRS.”

Despite these clarifications, there are still many SECURE Act items that remain murky, especially with trusts as beneficiaries of inherited IRAs. One such situation recently came across my desk. While this is a bit of a trick question, it did lead to an “unknown” within SECURE:

A person in his 80’s established a trust and named the trust as his IRA beneficiary. His five minor grandchildren were the beneficiaries of the trust. Pre-SECURE Act, these five minor trust beneficiaries could potentially receive annual RMD payments over the single life expectancy of the oldest child. But that is no longer always the case.

The question I received was, “Under the SECURE Act, could these five minor beneficiaries benefit from the stretch at all – maybe at least until they were age of majority?” The answer is No. “But I thought minor beneficiaries could stretch up to the age of majority, and at that point the 10-year rule would kick in. Is that not true?” It would be true if these five trust beneficiaries were minor children of the account owner. As it was, they were grandchildren of the account owner and therefore did not qualify for any stretch. The 10-year rule would most likely apply.

Hypothetically, assume that each of these trust beneficiary children were, in fact, minor children of the account owner. That could qualify them as “eligible designated beneficiaries” and potentially permit them to stretch RMD payments. But this is where the SECURE Act is still vague. Does the 10-year payout rule apply after they all have reached the age of majority? Does the 10-year rule spring forward simultaneously for the entire group of children when the oldest beneficiary reaches majority?

As things currently stand, nobody knows the definitive answer. When multiple minor children of the IRA owner are named as trust beneficiaries, we still need further IRS guidance on how to proceed with their payouts. Be aware that several items in the SECURE Act remain unclear. As we continue to dig through the law and uncover new questions, sometimes “We don’t know yet” is the proper response.