SECURE ACT (Proposed) Regulations Released – Minor Children Affected!
The IRS released long-awaited and much anticipated proposes regulations addressing changes to retirement account distributions brought about by the SECURE Act. Released on February 23, 2022, the regulations offer guidance on many of the new rules enacted under the SECURE Act. These proposed regulations are subject to a public comment period and a live hearing in Washington, DC, in June 2022. The IRS will issue final regulations thereafter (which could take some time).
Because the new regulations are almost 300 pages in length, they are taking some time to review and digest. So I’ll be posting the most relevant portions in separate posts to keep things simple. Here, we’ll examine the affect the proposed regulations will have on minor children who are the beneficiaries of inherited retirement accounts, including IRAs and 401(k)s.
Under the SECURE Act, a minor child of a deceased account owner may take distributions from an inherited account using the lifetime distribution rules until the child reaches the age of majority. The proposed regulations clarify that a minor child attains the age of majority on the child’s 21st birthday. Thereafter, she will no longer be considered eligible to use the lifetime distribution rules and must switch to the SECURE Act’s 10-year distribution rule, which will require her to withdraw the remaining balance of the inherited account by the end of the 10th calendar year following the year in which she reaches age 21.
(Under existing regulations, a minor child doesn’t reach the “age of majority” until age 26, provided they are still in school and haven’t completed a specified course of education.)
Example – IRA owner Sam dies in 2022. He named his daughter, Sally, as the sole beneficiary of the IRA. Sally will reach age 10 in 2022. Sally may take annual distributions from Sam’s IRA based upon her life expectancy using the applicable IRS single-life table until the year 2033, when she reaches age 21. Thereafter, she must fully liquidate the balance in Sam’s IRA before the end of 2043, the 10th calendar year following the year in which she turned 21 (2033).
If the minor child is also disabled or chronically ill within the meaning of the regulations, the minor child will be eligible to continue taking distributions over her remaining life expectancy even after reaching the age of majority.
Stayed tuned to this blog. We’ll be taking a look at other provisions of the proposed regulations in future posts.
If you are struggling to manage an inherited IRA or other retirement account, or need help planning for your retirement, give us a call. we can help.