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New Retirement Account Distribution Rules: What They Mean for You

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In December 2019, when the original SECURE Act was passed, sweeping changes were made to the post-death tax treatment of qualified retirement accounts. One of the biggest changes was eliminating the prior “stretch” treatment of post-death distributions for most non-spouse beneficiaries. These beneficiaries are now subject to the so-called 10-Year Rule, which requires beneficiaries to fully distribute inherited retirement accounts by the end of the 10th year following the original account owner’s death.

When the United States Internal Revenue Service (IRS) issued its initial Proposed Regulations in 2022 regarding the SECURE Act’s provisions, it included another bombshell: Not only would so-called “Non-Eligible Designated Beneficiaries” be subject to the 10-Year Rule, but if the original account owner had been subject to Required Minimum Distributions (RMDs) prior to their death, the beneficiary would also need to take annual RMDs throughout that 10-year period (in addition to fully distributing the account by the end of the 10th year).

Now, with its new Final Regulations issued in mid-July 2024, the IRS has confirmed the requirement for Non-Eligible Designated Beneficiaries to take RMDs annually. Fortunately, for beneficiaries who would have been required to take RMDs in 2021–2024 but didn’t, the IRS has confirmed that there will be no penalty and no requirement to make up the missed distribution, meaning the new regulation effectively starts with RMDs required to be taken in 2025.

Beyond confirming the general post-death RMD rules, the 260-page Final Regulations document offers a slew of other regulatory guidance for specific circumstances where the new rules for Eligible and Non-Eligible Designated Beneficiaries apply. These include:

  • New rules for handling undistributed RMDs in the year of an account owner’s death;
  • Specification that when a plan participant has 100% of their plan balance in a Designated Roth account, any Non-Eligible Designated Beneficiaries are not required to take annual RMDs during the period of the 10-Year Rule;
  • Clarification of the requirements for successor beneficiaries who, depending on the circumstances, may need to either begin a new 10-year period after which the account must be fully distributed or finish out the original beneficiary’s 10-year period;
  • New definitions of which beneficiaries of a See-Through Trust are also considered beneficiaries of the retirement account and which may be disregarded for retirement account purposes;
  • A new rule provides that when a See-Through Trust is divided into separate trusts for each beneficiary upon the death of the retirement account owner, the RMD rules will be applied individually for each trust beneficiary rather than uniformly across all beneficiaries based on the beneficiary with the shortest required distribution timeline; and

Along with the new Finalized Regulations, the IRS also released a new set of Proposed Regulations dealing with some unanswered questions around the SECURE 2.0 Act, which passed in late 2022. The SECURE Act 2.0’s new provision allows surviving spouses of retirement account owners to be treated as the decedent for RMDs. The treatment for surviving spouses won’t be identical to the decedent’s since the surviving spouse must still calculate RMDs based on their life expectancy. None of their beneficiaries will qualify as Eligible Designated Beneficiaries.

These regulations introduce significantly more complexity to the tax planning process for retirement accounts, particularly after the death of the account’s original owner. These updates make it essential for individuals to understand the new rules and how it may impact their succession planning.

Given all the complexities of retirement and tax planning, it’s worth considering how charitable giving can simplify your estate plan. By naming a charity, like the IEEE Foundation, as a beneficiary of your retirement account, you not only support a cause that matters to you but also help your heirs avoid complex distribution rules and potential tax burdens. To learn more about how you can include the IEEE Foundation in your plans, click here.

This article is intended to provide general gift-planning information. Our organization is not qualified to provide specific legal, tax or investment advice, and this publication should not be looked to or relied upon as a source for such advice. Consult with your own legal and financial advisors before making any gift.  

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