IRS Provides Details on Beneficiary Rules and CRD Repayments
The 2020 tax year version of IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), reflects the following noteworthy updates pursuant to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE), Coronavirus Aid, Relief, and Economic Security (CARES), and Consolidated Appropriations Acts.
The publication confirms that designated beneficiaries who are not eligible designated beneficiaries are generally subject to a 10-year payout period. It indicates not to use any of the distribution tables if either the 5-year rule or the 10-year rule apply. The publication also cautions beneficiaries that if the 10-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the 10th anniversary of the owner’s death is subject to the 50 percent excise tax—further validating that the applicability of the 10-year rule is similar to the 5-year rule and no annual minimum distributions would be required, so long as the account was depleted by December 31 of the final year. However, an example within the publication (that was used in previous versions) illustrates a life expectancy calculation for a designated beneficiary where presumably one would not be required, raising questions as to its applicability or whether it was an oversight when the publication was updated.
Additionally, the publication implies that the 10-year rule is not an option for an eligible designated beneficiary if the IRA owner died on or after her required beginning date. Again, this raises questions as to whether this was also an oversight or the IRS is suggesting that the “at least as rapidly” rule would remain for such eligible designated beneficiaries, meaning that life expectancy payments must continue to be disbursed from the IRA once an IRA owner has reached her required beginning date.
Election Deadline for Eligible Designated Beneficiaries
There were outstanding questions on deadlines for making beneficiary elections. The publication states that the deadline for an eligible designated beneficiary making an election is the earlier of
- December 31 of the year the beneficiary must take his first life expectancy payment or
- December 31 of the year containing the 10th anniversary year of the owner’s death (or 5th anniversary year of the owner’s death if applicable).
Nonpersons as Beneficiaries
The sections of the publication addressing beneficiaries who are not individuals remain largely unchanged, confirming that pre-SECURE Act rules continue to apply to non-person beneficiaries such as estates, charitable organizations, and nonqualified trusts. Moreover, the sections addressing the “look through” provision for trust beneficiaries also remains unchanged, where there are numerous outstanding questions on how the SECURE Act provisions apply to trust beneficiaries.
The publication specifies that a coronavirus-related distribution (CRD) repayment is to be treated as a trustee-to-trustee transfer in that it is not included in income. This suggests that a CRD taken from a Traditional IRA could not be repaid to a Roth IRA, since trustee-to-trustee transfers may only occur between similar account types.
Proposed regulations addressing beneficiary and required minimum distribution rules under the SECURE Act are anticipated soon and should provide additional clarity.