How does the Secure Act affect retirement account beneficiaries?

The Secure Act went into effect on January 1, 2020. This act changed the beneficiary distribution rules on many retirement accounts including 401(k), 403(b), Traditional and Roth IRA accounts.  This blog will help clarify those rules through several examples.

Surviving Spouse: 

The surviving spouse (if age 72 or older) is required to take a RMD (required minimum distribution) from the inherited account annually based on their life expectancy in the year following the decedent’s death.  Also, if the deceased spouse did not take their RMD (if applicable) before death, the surviving spouse is required to take that distribution before December 31st of the year of the spouse’s death.

Example: Bob passed away on February 2, 2022, at the age of 73, leaving his IRA account to his wife, Mary, who is 72.  Bob had not taken his RMD before death. Mary chose to have Bob’s IRA retitled into her name.   In 2022, she will need to take Bob’s RMD from her IRA.   In 2023 and subsequent years, Mary must take an annual RMD based on her life expectancy (see note 1).

Non-spousal beneficiaries:

If less than 10 years younger than the decedent, older than the decedent, disabled or chronically ill, they must take an RMD from their inherited account annually based on their life expectancy starting in the year following the decedent’s death (see note 2).

Example: Beth passed away on December 1, 2021 at the age of 80 leaving her IRA account to her sister, June, who was 83 at the time.  Beth had already satisfied her RMD for 2021, so June is not required to take a distribution from her beneficiary IRA account in 2021. Starting in 2022, June will have to take an RMD annually based on her life expectancy (note 2).

Non-spouse beneficiaries who are more than 10 years younger than the decedent must fully liquidate their beneficiary retirement account by 12/31 of the 10th anniversary of the decedent’s passing (note 3).  Currently, there is no annual RMD for these beneficiaries.

Example: John passed away on January 1, 2021 at the age of 75 leaving his IRA to his brother, George, who was 70 at the time.  John had not satisfied his RMD for 2021, so George was required to take John’s RMD from his beneficiary IRA account in 2021.  George will then have until December 31, 2031 to fully liquidate his beneficiary IRA account. He is not required to take an annual RMD within those 10 years (see note 1 for John’s 2021 RMD calculation).

Minor Children:

These beneficiaries are required to take an RMD from the inherited retirement account annually until they reach the age or majority (note 4).  Once the age of majority is reached, the beneficiary has until December 31 of the 10th year to completely liquidate the account (note 3).

Example: Madison inherited a Roth IRA account a month after she turned 15 from her grandmother in April 2020.  Madison was required to take a RMD from her Beneficiary Roth IRA account in 2021 and 2022 based on her life expectancy (note 1).    Since she will turn 18 in 2023, Madison will have until December 31, 2033 to fully liquidate her beneficiary Roth IRA account (because this is a Roth IRA, no RMD was required by her grandmother prior to her death).

Charities or Estate:

If either a charity or the decedent’s estate are named as beneficiary and the decedent is younger than 72 upon their death, the account must be fully liquidated by December 31 of the 5th anniversary of the decedent’s passing. There are no annual RMD rules for these beneficiaries.

Example: Kathy, age 65, passed away on March 13, 2022. She named her favorite charity, Helping Hounds, as her sole beneficiary for her Traditional IRA account. Since Kathy was younger than 72, Helping Hounds has until December 31, 2027 to liquidate the inherited account.  The charity is not required to take an annual RMD within that timeframe.

If either a charity or the decedent’s estate are named as beneficiary and the decedent is 72 or older at the time of their death, then an annual required minimum distribution must be distributed from the account based upon the decedent’s life expectancy should they have remained alive (note 1).

Example: Richard died on June 4, 2021 at the age of 72 and named his estate as beneficiary of his Traditional IRA account. He had already satisfied his RMD for 2021 prior to his death. Richard’s estate (or charity if beneficiary) is required to take an annual RMD starting in 2022 based on Richard’s life expectancy should he have remained alive.

Trust:

A trust can also be named as the beneficiary of a retirement account. Depending on what type of trust is named will determine which of the above categories it will fall into. An estate attorney should be consulted to determine which rule applies.

Special Exception to this Act:

Beneficiaries who inherited a 401(k), 403(b), Traditional or Roth IRA account prior to January 1, 2020 are exempt from this act and are required to continue to take an RMD annually from their account (note 2).

Example: Jim passed away on January 1, 2018 at the age of 72 leaving his IRA to his nephew, Ben, who was 60 at the time.  Jim had not satisfied his RMD for 2018, so Ben was required to take Jim’s RMD from his beneficiary IRA account in 2018 (note 1).   In 2019 and after, Ben must take an annual RMD based on his life expectancy (note 2).

Notes

  1. Reference IRS publication 590-B Appendix B Uniform Lifetime table. The RMD calculation is made by taking the value of the retirement account at the end of the previous year and dividing it by the appropriate factor found in the above referenced table.  From the example:  Bob’s 12/31/21 IRA balance was $150,000 and his age 73 factor from the table is 26.5.  $150,000/26.5 = $5,660.38.  This is the minimum amount that is required to be withdrawn from Mary’s IRA account in 2022 to satisfy Bob’s RMD, Mary can always take a larger amount.  The Uniform Lifetime Table will continue to be used to calculate her annual RMD.
  2. Reference IRS publication 590-B Appendix B Single Life Expectancy table. The beneficiary RMD calculation is made by taking the value of the retirement account at the end of the previous year and dividing it by the appropriate factor found in the above referenced table.  From the example:  June’s 12/31/21 Beneficiary IRA balance was $95,000 and her age 84 (in 2022) factor from the table is 8.7.  $95,000/8.7 = $10,919.54.  This is the minimum amount that must be taken, the beneficiary can always take a larger amount.
  3. Beneficiaries can take a distribution in any amount at any time during the 10 years. The inherited account is required to be fully liquidated at the end of the 10-year period.
  4. The age of majority, also known as the legal age, is the age at which the person gains the legal status of an adult. It is 18 in most states including New York.

In February 2022, the IRS released SECURE Act proposed regulations which may change the distribution rules if the beneficiary inherited an account that was already taking RMDs.  As of this article no final law has been passed.  The distribution rules in this article are complex and vary based upon the type of retirement account. It is imperative that you consult expert financial/tax/legal advice before acting on any information in this article.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.