The IRS has finalized new rules under the SECURE Act for multiple employer plans, clarifying changes to required minimum distribution rules and tax credits for small employers. Additionally, long-term, part-time workers can now contribute to 401(k) plans. The IRS is seeking public feedback on these new provisions.
The controversial 10-year rule was implemented, replacing the prior ‘Stretch IRA’ method. Now, beneficiaries must distribute an inherited IRA’s contents within a decade, potentially increasing their taxable income. This rule mainly impacts non-spousal heirs who find themselves having to empty the account within 10 years, which has caused debate due to the potential tax increase.
Inherited IRAs are divided into two groups — those where the original owners had not reached the minimum distribution age and those where the owners had started their distributions. Beneficiaries of the first type can distribute assets over 10 years from the year of the owner’s death or withdraw the sum in the 10th year. Those inheriting from the second group must continue the initial owner’s distribution schedule but can choose to speed up the process.
Finalized SECURE Act rules impact IRA distributions
The 10-year rule applies universally to traditional and Roth IRAs. For Roth IRAs, beneficiaries can delay distributions until the 10th year. In contrast, for traditional IRAs, the complete account balance must be distributed to beneficiaries within a decade, eliminating the “stretch IRA” strategy. Careful planning may be required to evade the tax implications of compressed distributions. Spouse beneficiaries, however, are not subject to this rule.
Despite temporary rule suspension, the IRS confirmed that no fines will be incurred for failing to take required distributions between 2021 and 2024. All inherited retirement accounts post-2019 must still be fully distributed within 10 years. Although there have been delays in regulation enforcement, it is critical for account holders to comply to steer clear of prospective penalties.
Most IRA inheritors distribute assets promptly, thus limiting the relevance of the 10-year rule and annual requirement to a specific subset of beneficiaries. Neglecting these rules could lead to significant tax implications, making them highly significant for beneficiaries who retain inherited assets for prolonged periods.
