New steerage clarifies RMDs for inherited IRAs

John Grobe

In a recent article, we addressed the fact that the latest edition of IRS Publication 590-B contradicts the accountants’ interpretation of the new rules for inherited IRAs promulgated by the Tax Cuts and Jobs Act (TCJA) . Until the March 25 revised 590-B release, the interpretation of TCJA followed by accountants and tax professionals was that unqualified Designated Beneficiaries were not required to make the minimum required distributions of inherited IRAs, but rather the entire inherited IRA within 10 Years.

However, new publication 590-B states that unauthorized named beneficiaries must take RMDs and empty the IRA within 10 years. A named beneficiary who is not entitled to a claim is, with a few exceptions, a non-marital beneficiary; Spouse beneficiaries can extend the inherited IRA beyond their life expectancy, but must have annual RMDs. This is often referred to as a “stretch IRA”.

Hopefully the IRS will clarify what is going on before the end of the year so that non-eligible named beneficiaries know what to do. However, the IRS itself has argued (and won) in court that you are relying on advice in IRS publications at your own risk. Yes that’s true; the IRS says you cannot rely on what they say in their educational publications!

The fact that IRS publications are not considered the main authority on tax matters is reminiscent of something Marvin Gaye once sang in the Inner City Blues: “Oh, make me yell and throw up both hands.”

The only authoritative sources of tax law are official laws, ordinances and court decisions. Along with many other sources that we could consider authoritative, IRS publications are considered a secondary authority.

Seven years ago, the IRS argued in another case dealing with IRAs and the 590 publication (which had not yet been broken down into Sections A and B), and the tax court ruled that only one 60-day extension per year of all can be made of your aggregated IRAs. This contradicted a longstanding position by the IRS that a 60-day rollover could be taken by any one person’s IRA every year. The court reached that decision by checking the language of the Internal Revenue Code.

The IRS has put taxpayers in the ultimate “damn if you do it, damn if you don’t” position. If taxpayers rely on the plain language of IRS publications, they could still lose their case. Sounds like the Twilight Zone to me.

Is saving for your children’s education getting in the way of your retirement goals? If so, why not try to fund college the same way you fund your retirement – gradually over a long period of time. When your child is born, open a 529 plan and fund it with monthly contributions by direct debit from your checking account. This will save you 18 years until your child is ready for college. All states have 529 plans, and many of the plans provide a tax break for state income taxes.

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