These days it seems that any column I write is out of date within days, if not hours, after the government rewrites one rule or another. My June 19 column on required minimum distributions was no different.
In it, a reader who took a required minimum distribution from her individual retirement account in January, before the Cares Act suspended RMDs for 2020, wanted to know if she could return it. The IRS had previously issued a notice stating, indirectly, that distributions taken after January 31 could be returned to retirement accounts before July 15, and would not be subject to taxes or penalties. My column gave several intricate ways that a person could return a January distribution, but also recommended being patient.
On June 23, the IRS announced that taxpayers who already took a minimum required distribution in 2020 of an IRA or 401 (k) plan could transfer those funds to a retirement account before August 31. He said, “This refund is not subject to the one 12-month rollover limitation or the rollover restriction for legacy IRAs.”
In response to the same column, Mike Tekautz of Modesto wrote: “I inherited a Roth IRA, an IRA and a 401 (k) rollover from my brother who passed away this year. He was 64 years old, I am 66. I have been told that accounts must be emptied for 10 years, and that RMDs are suggested, not mandatory. This seems contrary to what I read in your article that people of any age should be removed from retirement accounts that they inherit from someone other than their spouse. Can you clarify this for me?
I’ll try. Before this year, most people who inherited an IRA or 401 (k) account, and were named beneficiaries on the account, had to take distributions each year based on their life expectancy, beginning the year after account holder’s death.
For people between 60 and 60 years old or younger, this could be 20, 30 or more years. This tax exemption is called the “Stretch IRA”, as they could distribute distributions and the tax on them, for decades. Also, the account could continue to grow with tax deferred for many years.
(For Roth accounts, people do not have to take distributions from their own account, but they do have to take them from a legacy Roth, although distributions are generally tax free.)
Anyone who inherited a retirement account from someone who died before 2020 still follows those rules.
Last year, Congress passed the Security Act, which changed the rules for many people who inherit in 2020 or later. The law divided designated beneficiaries (named heirs into the account) into two groups. IRA expert Ed Slott compares them to “people on the Titanic.”
In first class are the “designated eligible beneficiaries”. These include: a surviving spouse, someone disabled or chronically ill, a person who is no more than 10 years younger than the original account holder, or a minor child of the account holder (but only until the child reaches the majority of age) They still take distributions each year based on their life expectancy. In other words, they get the Stretch IRA.
Tekautz falls into this category because he is older than his deceased brother.
More information
Can’t file taxes before July 15? Here is the form
Submitting your 2019 taxes before July 15 could be a problem if you don’t have a computer and used to get your taxes for free from the VITA or AARP Tax-Aide sites, which have been closed since April. You can request an extension to file your federal taxes before October 15 simply by submitting IRS Form 4868, but if you file it by mail you will probably have to download it from the Internet. For those without a computer, we have printed the form here. Remember, this gives you until October 15 to file a return, but if you have a balance due for 2019, to avoid a penalty you must pay it before July 15. If you do not have a balance due, you will not be penalized for not filing or requesting an extension before July 15.
If you live in California, Hawaii, Washington or Alaska, send this form to the IRS, PO Box 7122, San Francisco, CA 94120-7122, if it includes a payment. If you don’t include a payment, send it to the Treasury Department, IRS Service Center, Fresno, CA 93888-0045.
You do not need to request an extension to file your California taxes before October 15, but you must pay state taxes by July 15 to avoid a penalty.
Second class includes all other designated beneficiaries. They must liquidate the account at the end of the tenth year after the year the IRA owner died. This is called “the 10-year rule.” They do not have to take distributions every year, or according to any schedule, as long as the account is depleted within 10 years. This could result in higher taxes for people who are forced to withdraw money during their peak income years.
What is not entirely clear in the law is whether first-class people, eligible designated beneficiaries, can choose to use the 10-year rule instead of the Stretch IRA if that works best for them.
Some experts say they can, but the IRS has not yet intervened. “I suspect that when the IRS creates the regulations, they will allow designated eligible beneficiaries to opt for the Stretch and enter the 10-year rule,” said Jeff Levine, director of Advanced Planning at Buckingham Wealth Partners.
The good news is that “it won’t matter until next year, at the earliest, since that would be the time when people inheriting this year would have to take their first RMDs using the Stretch. Hopefully the IRS will make the widely held assumption. in a clear guide before that, “added Levine.
There is a third group, undesignated beneficiaries. These are properties, some trusts, and most people who inherit an account through them, rather than being named as beneficiaries in a retirement account. Its rules did not change much under the Security Law.
Slott says they are in “steerage” because they don’t get the Stretch IRA or the 10-year rule. In general, they get different rules depending on whether the account owner died before he or she had to start taking the minimum required distributions from the account. (This was April 1 of the year after he turned 70.5, but the Security Act raised the age to 72 from 2020.)
If the account holder had not yet reached that age, the non-designated beneficiary would not have to take annual distributions, but would have to exhaust the account within five years. If the original account holder had exceeded that age, the non-designated beneficiary would have to take annual distributions based on the original account holder’s life expectancy factor.
This highlights why people should always designate a beneficiary on their accounts.
Levine noted that, “If an IRA went through Dad’s estate and this is how you got the IRA, then you are an unnamed beneficiary. If Dad had an IRA custodian who had a predetermined provision that named his son as the beneficiary of his IRA if no beneficiary was named at the time of his death, then you would be a designated beneficiary because the IRA never went through ‘ the ‘real estate. “But” this default arrangement is not something someone should really plan to use. “
Remember that the Care Act suspended the minimum required distributions, including those for legacy accounts, only for 2020.
Kathleen Pender is a columnist for the San Francisco Chronicle. Email: [email protected] Twitter: @kathpender
