Effective January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) made significant changes to the rules governing retirement plans and IRAs. Most of the changes are designed to help individuals save more for retirement. One of the provisions of the SECURE Act, however, has been perceived by some as reducing benefits for certain beneficiaries of retirement plan accounts and IRAs. This provision of the SECURE Act changes the payment options for beneficiaries so that tax-deferred retirement savings enter the tax stream faster, in some cases, after the death of the original saver.
Prior Rules Still Apply to Beneficiaries Who inherited before 2020
If a beneficiary inherited retirement savings prior to January 1, 2020, they may continue to follow the rules in effect prior to the SECURE Act for determining their payment options. The payment options available under these rules depend on whether the beneficiary was a spouse to the participant, a non-spouse, or a non-individual (such as a trust or the estate) and whether the participant died before or after their starting date for taking required minimum distributions (RMDs).
Death Before RMD Starting Date
Death After RMD Starting Date
Changes Made by Secure Act
The SECURE Act eliminated the life expectancy payment option for most beneficiaries. When inherited assets are in an IRA, this option is also known as the “stretch IRA” because taking only the minimum annual payment each year allows a beneficiary to stretch out the tax deferral and growth potential on the retirement savings. Beginning January 1, 2020, most beneficiaries will be required to distribute their inherited retirement savings within 10 years following the death of the original account holder. Beneficiaries may take payment at any time and in any frequency so long as they deplete the account by the end of the 10th year (e.g., take payment immediately, spread payments over 10 years, or wait until 10th year to take a lump sum).
Changes Made by Secure Act
The options available to a beneficiary who inherits a retirement plan account or IRA on or after January 1, 2020, depend on whether a beneficiary is an “eligible designated beneficiary.”
Eligible Designated Beneficiary (EDB)
Beneficiary Payment Options
Person Who Is Not an Eligible Designated Beneficiary (EDB)
What Hasn’t Changed
The federal tax laws provide the full range of permissible options for beneficiaries. Retirement plan documents may provide fewer or more restrictive options. Beneficiaries are also still able to roll over their inherited retirement plan account balances to an inherited IRA, from which they must continue taking payments as required under the federal rules or the IRA document. The payment options for non-human beneficiaries after the SECURE Act also remain the same as before the SECURE Act, including the five-year rule and the exception for qualified trusts.
Plan Sponsor Action Steps
The new rules as explained here are based on current interpretation of the statutory language in the SECURE Act. The retirement plan industry awaits additional guidance from the Treasury Department to clarify details related to these changes. Plan sponsors may want to rely on their third party administrator or recordkeeper for guidance in providing information to beneficiaries who inherit plan accounts in 2020 and later years. Beneficiaries should also be encouraged to seek tax or legal advice before electing a payment option.