Ed Slott: New IRS Secure Act Regs Are an RMD 'Nightmare'

"For two years we all thought that OK, Congress did away with the stretch IRA for most non-spouse beneficiaries and replaced it with a 10-year rule requiring all the inherited funds to be withdrawn by the end of the 10-year term," Slott said.

"That actually made things much simpler since there was generally no need any more to calculate RMDs, identify beneficiaries to determine the measuring life, or to know which rules applied based on when death occurred (either before or after the required beginning date — the RBD)," he said.

The regs, however, "now bring back that original RMD complexity and add it to the 10-year rule, creating new layers of planning to determine the post-death RMD payouts to beneficiaries."

The rules are effective now, Slott said, "and could possibly even affect 2021 RMDs that should have been taken but weren't because no one thought they were required."

The IRS will hopefully provide relief on this point, he said.

Payouts Now Under 10-Year Rule

Under the regs' 10-year rule, to determine the payouts to beneficiaries, "you first must know when the IRA owner died," Slott explained.

"If death was before the required beginning date (RBD) then no annual RMDs are required. The only RMD would be at the end of the 10-year term when the full balance of the inherited IRA must be withdrawn," he said.

If death occurs "on or after the RBD, then annual RMDs are required for years 1-9, based on the regular stretch IRA rules, and then again, the full balance of the inherited IRA must be withdrawn by the end of the 10-year term," Slott explains.

"This means that we must go back to calculate relatively small RMDs for years 1-9, which brings in more complexity especially when there are multiple beneficiaries with different life expectancies."

Different Rules for Roth IRA and Traditional IRA Beneficiaries

Roth IRA owners "will always be deemed to have died before their RBD (regardless of their age at death) since Roth IRAs have no lifetime RMDs," Slott said. "Roth IRA inheritors will not have to take RMDs for years 1-9, like other IRA beneficiaries might."

The 10-year rule RMD interpretation "carries the confusion over to successor beneficiaries (after the beneficiary dies), who also may be subject to RMDs base on the original beneficiary's life if the original beneficiary died before the 10-year term expired, and if that beneficiary inherited from an IRA owner who died after his RBD," Slott explained. "Who is going to keep track of all these key dates and rules?"

These rules will also apply to trust beneficiaries which can mean RMDs for years 1-9 that would have to be paid out to trusts, and which could (depending on the type of trust) be taxable at high trust tax rates each year.

There are also new rules for multiple beneficiaries (when one beneficiary for example is an EDB and the other is not) and for trusts, which are generally favorable to the beneficiaries if they can navigate the rules.

While surviving spouses were thought to be generally unscathed by all these rules, since they are EDBs, it turns out that the regulations also affect them.

'Bizarre' New RMD Term

The IRS created an "incredulous new term 'hypothetical required minimum distributions' to make sure that certain spouses who elected the 10-year rule don't avoid RMDs that would otherwise have had to be taken when that spouse hit RMD age — 72," Slott explained.

"This one is bizarre."

These "hypothetical" RMDs "are not really RMDs that must be taken, but additional annual RMD calculations will have to be made each year to determine how of much of the IRA that the spouse inherited from his/her spouse can be rolled over in a spousal rollover, since RMDs cannot be rolled over," Slott said.

The IRS considers these "hypothetical" RMDs "as funds that cannot be rolled over in spousal rollover. Yearly calculations will have to be made to determine how much of the IRA the spouse inherited from his or her spouse can be rolled over as a spousal rollover."