The SECURE Act brought sweeping changes to the post-death tax treatment of qualified retirement accounts. Specifically, it eliminated the prior “stretch” treatment of post-death distributions for most non-spouse beneficiaries, making them subject to the so-called 10-Year Rule.

The Act also mandated the full withdrawal of certain accounts within 10 years of the accountholder’s death for most non-spouse beneficiaries. Further, it created a new type of beneficiary: the eligible designated beneficiary (EDB).

These are changes that many clients may not be aware of, especially those who haven’t reviewed their retirement or estate plans in recent years.

Eligible designated beneficiary

Eligible designated beneficiaries include a surviving spouse, a minor child of the decedent, a chronically ill or disabled person, or a person not more than 10 years younger than the deceased accountholder. Certain EDBs have the option of using a life-expectancy payout, which clients may be even less aware of than the SECURE Act’s other changes.

Surviving Spouses

The SECURE Act and its final regulations (issued on July 18, 2024) provide surviving spouses greater

flexibility and options when inheriting retirement accounts.

A surviving spouse who is the sole designated beneficiary of a retirement account can now elect to be treated as the deceased employee for required minimum distribution (RMD) purposes, so that the surviving spouse can delay starting RMDs until the deceased spouse would have reached their required beginning date.

Surviving spouses can also elect to keep the account as an inherited account and take distributions

based on their own life expectancy; or roll over the account into their own IRA.

Additional considerations

The final regulations provide that if:

1. the designated beneficiary inherited a non-Roth IRA or qualified retirement plan
2. the designated beneficiary is not an “eligible designated beneficiary,” and
3.  the accountholder died on or after their RBD,1 the designated beneficiary must take RMDs each year over the 10-year withdrawal period, and the designated beneficiary cannot wait until the final year to withdraw the full amount.

On the other hand, if the accountholder died before their RBD (or if the accountholder’s entire plan balance was in a Roth account), the designated beneficiary does not need to take RMDs and may wait until the 10th year to withdraw the funds. In determining RMDs, it is now critical whether the

account owner died before or after their RBD.

Exceptions

“Chronically ill” and “disabled” individuals are still able to use the “stretch option.”

For example, if Mark is a chronically ill or disabled individual whose father dies after his RBD, Mark is not subject to the 10-year rule.

He can stretch the account balance for the remainder of his life, taking RMDs yearly according to the IRS life expectancy tables. If Mark’s father had died before his RBD, then Mark would have the option

of the 10-year rule and deferring distributions until the tenth year following his father’s death.

Minor vs. adult children

The SECURE Act provides that a minor child of the participant (“employee”) is an EDB. However, unlike other EDBs, the child’s EDB status does not last for life. Instead, it terminates when the child “reaches majority.”

The IRS defines “reaches majority” as the date the child reaches their 21st birthday. The account must be fully distributed 10 years after reaching majority (or 10 years after the child dies if they die before reaching majority).

A person not more than 10 years younger than the deceased accountholder is also an EDB. For example, Michael, who is single, dies at age 78 with a traditional IRA and names his 85-year-old brother, Joe, as his sole beneficiary. Joe will need to take RMDs based on his life expectancy. An older EDB can elect to use the 10-year rule instead of the life expectancy payout only if the account owner dies before their RBD.

If the account owner died after his RBD, the EDB must use their life expectancy, even if it is less than 10

years (i.e., a mid-80 beneficiary will have a life expectancy of about 8 years).

The end of the grace period

The final regulations end the grace period for taking required withdrawals from certain IRAs. For beneficiaries who would have been required to take RMDs in 2021–2024 but did not, there will be no penalty and no requirement to make up the missed distributions.

However, the Service retained the original 10-year period for those heirs to withdraw the funds. Those

who took advantage of the grace period now have fewer years to empty the account.

Impact on withdrawal strategies

Since the final regulations will impact the withdrawal  strategy for inherited retirement accounts, consider alerting clients to the need to review existing or develop new plans for addressing the withdrawals from inherited retirement accounts. For example, where still allowed, it may be tempting to take the minimum withdrawal to minimize income taxes. However, if the beneficiary waits until the 10th year to take a withdrawal, the beneficiary will face a painful one-time tax bill.

The consequences of a large income boost in the 10th year could also impact a family’s eligibility for college financial aid

or create exposure to additional Medicare taxes.

The tax information presented here is for general information only and should not be used nor relied upon as specific tax advice. Taxpayers should

consult with their CPA or qualified tax professional for advice regarding their own tax situation and the tax status of LTC premiums and benefits.

1 The RBD is the date on which a retirement account plan participant must start taking RMDs and it is usually April 1 of the year the accountholder reaches an age between 70-1/2 and 73, depending on the accountholder’s birth date, unless the taxpayer falls under the “still working” exception.