Regulations bring more clarity to planning for taxable retirement benefit distributions after a taxpayer’s death.
The IRS has released final regulations that bring significant changes to the rules governing required minimum distributions (RMDs). These updates are crucial for certified public accountants advising clients on retirement planning. Here are key points:
Changes to RMD Age Requirements
The final regulations adjust the age for the required beginning date for RMDs based on the participant’s birth date:
- Born before July 1, 1949: Age 70½
- Born on or after July 1, 1949, and before Jan. 1, 1951: Age 72
- Born on or after Jan. 1, 1951, and before Jan. 1, 1959: Age 73
- Born on or after Jan. 1, 1960: Age 75
For multi-employer plans, an employee who is not a 5% owner and retires from one participating employer but continues working for another is not considered “retired” for RMD purposes.
Compliance With Secure Act Proposed Regulations
For periods before Jan. 1, 2025, compliance with the Secure Act proposed regulations is deemed a reasonable, good faith interpretation of the statutory changes. CPAs should retain materials from previous years for reference.
Eligible Designated Beneficiaries
The final regulations maintain the concept of eligible designated beneficiaries (EDBs), which include:
- Surviving spouse
- Account owner’s child under age 21
- Disabled beneficiary
- Chronically ill beneficiary
- Beneficiary not more than 10 years younger than the account owner
Different rules apply to certain EDBs, such as the surviving spouse’s ability to choose between the 10-year rule and life expectancy payments. If the plan lacks specific language, the default rule of life expectancy payments applies.
Disappointments & Welcome Changes
Disappointments
- Annual RMDs are required if the participant dies after the required beginning date.
- Beneficiaries do not need to make up distributions for 2021-2024 due to IRS reprieves.
- The 10-year outer limit remains for EDBs after their death.
Welcome Changes
- The penalty for missed RMDs is reduced from 25% to 10% if corrective actions are taken within the “correction window” and a return (Form 5329) is filed reflecting the 10% penalty.
- The correction window is defined as the earliest of the end of the second year following the missed RMD year, the mailing of a deficiency notice, or the assessment of the 25% penalty.
Planning Opportunities
The final regulations allow the RMD in the year of the employee’s death to be distributed to any beneficiary, providing flexibility in estate planning.
Elimination of Separate Account Rule
The IRS has eliminated the requirement for separate accounts at the beneficiary designation level. Retirement plan assets can now be divided within a trust provided a retirement account is divided on a pro rata basis. Many existing trusts have a “pick and choose” formula that would violate this rule. Have clients update their trusts if they have significant retirement plans that will be payable to a trustee of a trust upon death.
State Law Modifications
State law modifications of a trust that add or delete beneficiaries will be respected if made by Sept. 30 of the year following the employee’s death.
See-Through Trust Rule
The see-through trust rule remains unchanged, but the final regulations clarify which beneficiaries need to be considered and which can be disregarded.
Spousal Election
Section 327 of Secure Act 2.0 introduces a special spousal election, allowing the use of the Uniform Lifetime Table and delaying RMDs until the employee spouse would have been required to take them. However, this election does not allow a spouse to avoid RMDs on a Roth account entirely.
Roth Accounts
The Secure Act states that RMDs do not apply to amounts in Roth accounts. The final regulations clarify that lifetime distributions from Roth accounts do not count as RMDs and can be rolled over to a new Roth account.
In conclusion, the Secure Act sets forth specific rules governing required minimum distributions after death whereas practitioners previously had to advise clients based largely upon a hodge podge of private letter rulings. This is an improvement. However, if the goal of the final regulations was simplicity, the IRS failed in that regard.
Kent Endacott is a co-founder of Endacott Timmer, a boutique law firm focused on trusts and estates. Endacott has extensive experience in IRS matters and has successfully represented clients before the Internal Revenue Service in U.S. Tax Court. He is a member of the American College of Trust and Estate Counsel and currently serves on its Fiduciary Income Tax Committee and Employee Benefits Committee. He can be reached at kendacott@endacotttimmer.com.
