Awaiting guidance on distributions

minimum distribution in 2020 from an IRA or 401(k)type plan could roll those funds back into a retirement account by Aug. 31. It said “this repayment is not subject to the one rollover per 12month period limitation and the restriction on rollovers for inherited IRAs.”

In response to the same column, Mike Tekautz of Modesto wrote: “I have inherited a Roth IRA, rollover IRA and 401(k) from my brother who passed away this year. He was 64, I am 66. I have been told that the accounts need to be emptied by 10 years, and that the RMDs are suggested, not mandatory. This seems contrary to what I read in your article that said people of any age must take them from retirement accounts they inherit from someone other than a spouse. Can you clarify this for me?”

I’ll try. Before this year, most people who inherited an IRA or 401(k)type account — and were named as the beneficiary on the account — had to take distributions every year based on their life expectancy, starting the year after the account owner died.

For people in their mid60s or younger, this could be 20, 30 or more years. This tax break is called the “Stretch IRA,” because they could spread out distributions, and the tax on them, over decades. Plus, the account could continue to grow taxdeferred for many years.

(For Roth accounts, people do not have to take distributions from their own account, but do have to take them from an inherited Roth, although the distributions are generally taxfree.)

Anyone who inherited a retirement account from someone who died before 2020 still goes by those rules.

Last year, Congress passed the Secure Act, which changed the rules for many people who inherit in 2020 or later. The act divided designated beneficiaries (heirs named on the account) into two groups. IRA expert Ed Slott compares them to “people on the Titanic.”

In first class are “eligible designated beneficiaries.” These include: a surviving spouse, someone who is disabled or chronically ill, a person who is not more than 10 years younger than the original account owner, or a minor child of the account owner (but only until the child reaches the age of majority). They still take distributions every year based on their life expectancy. In other words, they get the Stretch IRA.

Tekautz falls into this category because he’s older than his deceased brother.

In second class are all other designated beneficiaries. They must liquidate the account by the end of the 10th year after the year the IRA owner died. This is called “the 10year rule.” They don’t have to take distributions every year, or according to any schedule, as long as they deplete the account within 10 years. This could result in higher taxes for people who are forced to withdraw the money during their peak earning years.

What’s not entirely clear in the law is whether the people in first class — eligible designated beneficiaries — can opt to use the 10year rule instead of the Stretch IRA if that works out better for them.

Some experts say they can, but the IRS has not weighed in yet. “I suspect that when the IRS creates the regulations, they will allow eligible designated beneficiaries to opt out of the Stretch and into the 10year rule,” said Jeff Levine, director of Advanced Planning with Buckingham Wealth Partners.

The good news is that it “won’t matter until next year, at the earliest, as that would be the time that individuals inheriting this year would have to take their first RMDs using the Stretch. Hopefully the IRS will turn the widelyheld assumption into clear guidance before then,” Levine added.

be penalized for failing to file or request an extension by July 15.

If you live in California, Hawaii, Washington or Alaska, mail this form to the IRS, P.O. Box 7122, San Francisco, CA 94120-7122, if you are including a payment. If you’re not including a payment, send it to the Department of Treasury, IRS Service Center, Fresno, CA 93888-0045.

You do not need to request an extension to file your California taxes by Oct. 15, but you still need to pay state taxes due by July 15 to avoid a penalty.

There’s a third group, nondesignated beneficiaries. These are estates, some trusts and most people who inherit an account through them, as opposed to being named as a beneficiary on a retirement account. Their rules didn’t change much under the Secure Act.

Slott says they’re in “steerage” because they don’t get the Stretch IRA or the 10year rule. They generally get different rules depending on whether the account owner died before he or she had to begin taking required minimum distributions from the account. (This had been April 1 the year after you turn 70.5, but the Secure Act raised the age to 72 starting in 2020.)

If the account owner had not yet reached that age, the nondesignated beneficiary would not have to take annual distributions, but would have to deplete the account within five years. If the original account owner had passed that age, the nondesignated beneficiary would have to take annual distributions based on the original account owner's life expectancy factor.

This highlights why people should always designate a beneficiary on their accounts.

Levine noted that, “If an IRA passed through dad’s estate and that’s how you got the IRA, then you’re a nondesignated beneficiary. If dad happened to have an IRA custodian that had a default provision naming his child 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 estate.” But “this default provision is not something that someone should really plan to use.”

Remember that the Cares Act suspended required minimum distributions, including those from inherited accounts, for 2020 only.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender