We believe that the beneficiary would be considered an “eligible designated beneficiary” under recent changes to the Internal Revenue Code, which means they have two options for taking distributions from an inherited IRA. As described in more detail below, the option they choose determines whether and when they must begin taking RMDs.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became effective in 2020, created a new category of beneficiaries called “eligible designated beneficiaries.” This category includes any individual who is not more than ten years younger than the deceased owner (among other categories of individuals, such as the IRA owner’s spouse or minor child, or a disabled or chronically ill individual). Since your customer is only a few years younger than the deceased owner, we believe they would be considered an eligible designated beneficiary.

Under the SECURE Act, IRA owners are not required to begin making annual RMDs until they reach the age of 72 (or 70 ½ for individuals who reached that age before January 1, 2020). If an IRA owner dies before their RMDs have begun, their interest must either be: (1) distributed over the life or life expectancy of the eligible designated beneficiary, with the distributions generally beginning no later than one year after the date of the IRA owner’s death, or (2) distributed within ten years after the death of the IRA owner.

If your customer elects the first option, we believe they would need to take their first RMD no later than December 31 of the year after the year the IRA owner died. (Note that only an eligible designated beneficiary who is a surviving spouse may wait until the year the deceased owner would have reached age 72 to begin taking RMDs.)

If your customer elects the second option (the “10-year rule”), they must withdraw the entire IRA balance by December 31 of the year containing the ten-year anniversary of the IRA owner’s death. The beneficiary may, but is not required, to take distributions prior to that date.

For resources related to our guidance, please see:

• Internal Revenue Code, 26 USC 401(a)(9)(E)(ii) (“The term ‘eligible designated beneficiary’ means, with respect to any employee, any designated beneficiary who is

(I) the surviving spouse of the employee,

(II) subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)),

(III) disabled (within the meaning of section 72(m)(7)),

(IV) a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or

(V) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.”)

• IRS Retirement Topics – Beneficiary, Death of the account holder occurred in 2020 or later (“In 2020 and later, options for a beneficiary who is not the spouse of the deceased account owner depend on whether they are an ‘eligible designated beneficiary.’ An eligible designated beneficiary is

• Spouse or minor child of the deceased account holder
• Disabled or chronically ill individual
• Individual who is not more than 10 years younger than the IRA owner or plan participant

An eligible designated beneficiary may

• Take distributions over the longer of their own life expectancy and the employee's remaining life expectancy, or
• Follow the 10-year rule (if the account owner died before that owner's required beginning date))”

• IRS Proposed Rule on Required Minimum Distributions, 87 Fed. Reg. 10504, 10504, February 24, 2022 (“Section 401(a)(9)(B)(ii) and (iii) provides that, if the employee dies before required minimum distributions have begun, the employee's interest must either be: (1) Distributed (in accordance with regulations) over the life or life expectancy of the designated beneficiary with the distributions generally beginning no later than 1 year after the date of the employee's death; or (2) distributed within 5 years after the death of the employee. However, under section 401(a)(9)(B)(iv), a surviving spouse may wait until the date the employee would have attained age 72 to begin taking required minimum distributions.”)
• Internal Revenue Code, 26 USC 401(a)(9)(B)(iii) (“Required distribution where employee dies before entire interest is distributed.— . . . (iii) Exception to 5-year rule for certain amounts payable over life of beneficiary.—If—

(I) any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary,

(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and

(III) such distributions begin not later than 1 year after the date of the employee’s death or such later date as the Secretary may by regulations prescribe, for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.”)

• IRS Proposed Rule on Required Minimum Distributions, 87 Fed. Reg. 10504, 10505, February 24, 2022 (“Section 401(a)(9)(H) (which was added as part of section 401 of the SECURE Act) provides special rules that generally apply to the distribution of an employee's remaining interest in a defined contribution plan after the death of that employee. Specifically, section 401(a)(9)(H)(i) provides that, except in the case of a beneficiary who is not a designated beneficiary, section 401(a)(9)(B)(ii): (1) Is applied by substituting 10 years for 5 years; and (2) applies whether or not distributions of the employee's interest have begun in accordance with section 401(a)(9)(A). Section 401(a)(9)(H)(ii) provides that section 401(a)(9)(B)(iii) (permitting payments over the life or life expectancy of the designated beneficiary as an alternative to the 10-year rule) applies only in the case of an eligible designated beneficiary.”)

• Internal Revenue Code, 26 USC 401(a)(9)(H)(i) (“In the case of a defined contribution plan, if an employee dies before the distribution of the employee's entire interest—

(i) In general. Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)—

     (I) shall be applied by substituting ‘10 years’ for ‘5 years’, and

     (II) shall apply whether or not distributions of the employee's
     interests have begun in accordance with subparagraph (A).”)

• Internal Revenue Code, 26 USC 401(a)(9)(H)(ii) (“Exception for eligible designated beneficiaries.—Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary.”)

• IRS Publication 590-B, Distributions from IRAs (For use in preparing 2021 Returns) (“If the owner died before his or her required beginning date (defined earlier) and you are an eligible designated beneficiary, you must generally base required minimum distributions for years after the year of the owner's death using your single life expectancy shown in Table I in Appendix B . . .”)

• IRS Publication 590-B, Distributions from IRAs (For use in preparing 2021 Returns) (“If the owner died before his or her required beginning date and the surviving spouse is the sole designated beneficiary, the following rules apply. . . . If the owner died before the year in which he or she reached age 72 (age 701/2 if the owner was born before July 1, 1949), distributions to the spouse don't need to begin until the year in which the owner would have reached age 72 (or age 70½, if applicable).”

• IRS Publication 590-B, Distributions from IRAs (For use in preparing 2021 Returns) (“The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December 31, 2031. The beneficiary is allowed, but not required, to take distributions prior to that date. The 10-year rule applies if (1) the beneficiary is an eligible designated beneficiary who elects the 10-year rule, if the owner died before reaching his or her required beginning date; or (2) the beneficiary is a designated beneficiary who is not an eligible designated beneficiary, regardless of whether the owner died before reaching his or her required beginning date.”)

• IRS Publication 590-B, Distributions from IRAs (For use in preparing 2022 Returns) – DRAFT