When the unique SECURE Act was handed in December 2019, it introduced sweeping modifications to the post-death tax remedy of certified retirement accounts. One of many largest modifications was to remove the prior “stretch” remedy of post-death distributions for many non-spouse beneficiaries, who are actually topic to the so-called 10-Yr Rule requiring beneficiaries to completely distribute inherited retirement accounts by the top of the tenth yr following the unique account proprietor’s demise.
In early 2022, when the IRS issued its preliminary Proposed Laws relating to the SECURE Act’s provisions, it included one other bombshell: Not solely would so-called “Non-Designated Beneficiaries” be topic to the 10-Yr Rule, however, if the unique account proprietor had been topic to Required Minimal Distributions (RMDs) previous to their demise, the beneficiary would additionally must take annual RMDs all through that 10-year interval (along with totally distributing the account by the top of the tenth yr).
And now, in its new Closing Laws issued on July 18, 2024, the IRS has confirmed the requirement for Non-Designated Beneficiaries to take RMDs yearly (though for beneficiaries who would have been required to take RMDs in 2021–2024 however did not, the IRS has confirmed that there will probably be no penalty and no requirement to make up the missed distribution, that means the brand new regulation successfully begins with RMDs required to be taken in 2025).
Past the affirmation of the final post-death RMD guidelines, the 260-page Closing Laws doc affords a slew of different regulatory steerage for particular circumstances the place the brand new guidelines for Eligible and Non-Eligible Designated Beneficiaries apply. These embody:
- New guidelines for dealing with undistributed RMDs within the yr of an account proprietor’s demise;
- A brand new “Hypothetical RMD” rule for surviving spouses who initially elect to make use of the 10-Yr Rule however later select to roll over or deal with the inherited account as their very own;
- Specification that when a plan participant has 100% of their plan steadiness in a Designated Roth account, any Non-Eligible Designated Beneficiaries will not be required to take annual RMDs through the interval of the 10-Yr Rule;
- Clarification of the necessities for successor beneficiaries who, relying on the circumstances, might must both start a brand new 10-year interval after which the account have to be totally distributed or end out the unique beneficiary’s 10-year interval;
- New definitions of which beneficiaries of a See-By way of Belief are additionally thought of beneficiaries of the retirement account and which can be disregarded for retirement account functions;
- A brand new rule offering that when a See-By way of Belief is split into separate trusts for every beneficiary upon the demise of the retirement account proprietor, the RMD guidelines will probably be utilized individually for every belief beneficiary moderately than uniformly throughout all beneficiaries primarily based on the beneficiary with the shortest required distribution timeline; and
- Clarification that when a retirement account (together with IRAs) owns each annuity and non-annuity property, these property may be aggregated collectively for the needs of calculating the participant’s RMD and that funds from the annuity can depend towards the full RMD for each annuity and non-annuity property.
Together with the brand new Finalized Laws, the IRS additionally launched a brand new set of Proposed Laws coping with some unanswered questions across the SECURE 2.0 Act handed in late 2022. Most notably, the brand new Proposed Laws verify that the RMD age for people born in 1959 is 73 (since a drafting error within the ultimate laws inadvertently set that RMD age to each 73 and 75) and fill in guidelines across the SECURE Act’s new provision permitting surviving spouses of retirement account homeowners to elect to be handled because the decedent for RMD functions – though, because the Proposed Laws clarify, the remedy for surviving spouses will not actually be an identical to the decedent’s for the reason that surviving partner should nonetheless calculate RMDs primarily based on their very own life expectancy, and none of their very own beneficiaries will qualify as Eligible Designated Beneficiaries.
As an entire, these laws introduce considerably extra complexity to the method of tax planning round retirement accounts, significantly after the demise of the account’s unique proprietor. Which makes it all of the extra precious for monetary advisors to get conversant in the brand new guidelines and their planning implications for various circumstances, since purchasers will probably be extra reliant on sound recommendation to offer them readability and assist them keep away from pitfalls when deciding what to do!
