IRS’ SECURE Act Final Regulations for Required Minimum Distributions: Another Summary
Planning for Retirement Benefits Under the SECURE Act
Here at the Law Office of Ryan J. Casson, understanding and planning for your retirement (or working to continue your financial freedom you already enjoy if you are already retired), and maximizing the wealth transferred to your beneficiaries, is of paramount importance. Attorney Ryan J. Casson integrates your retirement accounts with your California revocable living trust and estate plan.
Unless your qualified retirement assets are “Roth” accounts (meaning that you already paid income tax when you contributed the amounts while employed, or when you converted to a Roth account), your IRA and 401(k), etc. are “big bags of untaxed income.” That’s why Attorney Ryan J. Casson is writing another web article on the SECUE Act and you, your revocable living trust, and your estate plan. It’s a very important topic! California estate planning attorney Ryan J. Casson does not shy away from incorporating complex IRA matters into an estate plan.
Background: The SECURE Act of 2019, SECURE 2.0 of 2022, 2024 Final Regulations to the SECURE Act of 2019, and 2024 Proposed Regulations to SECURE 2.0 of 2022 (the IRS issued Final and Proposed Regulations on July 19, 2024), together work to restate, update, and clarify the required minimum distribution (RMD) rules. In short, the RMD rules serve as a (very complex) framework for determining how Americans’ qualified retirement accounts are distributed, during life and at death.
You should note that many estate planning attorneys and estate-planning related materials address RMDs and related issues at the death of the account owner. That is the case with this article, much of the content on this website, and Attorney Ryan J. Casson’s practice in general. Please be sure to consult your CPA or plan administrator for advice as to lifetime distributions (and any post-death related planning questions).
Applicable Retirement Assets: The IRS’ RMD framework applies to traditional and Roth IRAs as well as traditional and Roth 401(a), 401(k), 403(b), and 457(b) plans. While in technical parlance IRAs have ownersand 401(k)-type defined contribution plans have participants, in practice, the terms are synonymous and are, in general, interchangeable.
Effective Date: For purposes of determining RMDs beginning after December 31, 2024 (on or after January 1, 2025), the Final Regulations are applicable. For RMDs payable before January 1, 2025, the IRS looks for reasonable, good faith interpretations of SECURE and SECURE 2.0 and the Proposed Regulations. But be aware that the effective date of the RMD rules may differ depending on whether you have a non-governmental or governmental defined contribution 401(a), 401(k), 403(b), or 457(b) plan.
Key Lessons from the Final RMD Rules
The Final Regulations clarify various ambiguities, including but not limited to the following:
Special rules for surviving spouses that extend the time period in which the surviving spouse can “stretch” the account. This is one of the biggest and most advantageous takeaways from the Final Regulations.
Another major “win” for families are the special rules for children of the deceased participant who, at the time of the participant-parent’s death, had not reached the age of majority. In short, if the child was a minor (under the age of 21), there may be planning strategies available to “stretch” the IRA.
Roth 401k), 403(b), and governmental 457(b) plans no longer require the owner to take lifetime RMDs. This includes designated Roth accounts in 401(k) accounts, or DRACs. This update puts Roth 401(k)-type accounts in line with Roth IRAs, which do not require lifetime RMDs. This consistent treatment of Roth IRAs and Roth 401(k)s is a welcome change.
As a consequence of the above point regarding Roth 401(k)-type accounts, the inherent result is that the participant of a Roth 401(k) is deemed to decease before the required beginning date (RBD). The participant will be treated as though he or she had died “pre-RBD.” While eligible designated beneficiaries (EDBs) inheriting Roth 401(k)-type accounts are required to take annual RMDs regardless of whether the deceased participant died before or after their RBD, a designated beneficiary (DB) who is not an EDB will not be required to take annual RMDs, but will be required to liquidate the account no later than the end of the calendar year containing the tenth (10th) anniversary of the participant’s death (See below). Together, the ability of the 401(k) account participant to avoid taking lifetime RMDs, combined with the DB’s (but not EDB’s) ability to avoid annual RMDs during Years 1 through 9, offer a potential planning strategy that is both powerful and flexible for the beneficiary. It will be crucial for the beneficiary to consult with their own CPA to time RMDs and project annual tax consequences (waiting until Year 10 may often be a bad idea!).
Satisfying RMDs rules through aggregating certain accounts and contracts. As always, if you have more than qualified retirement account, it is very important to consult a CPA and your plan advisors or other advisors to ensure that all annual lifetime RMDs are taken.
Clarification of how and when to establish EDB status for a disabled or chronically ill beneficiary.
Clarification that nongovernmental 457(b) plans are subject to SECURE.
Clarification as to obtaining separate account treatment.
Clarification and affirmation of the ill-received and ubiquitously disliked rule from the Proposed Regulations that the so-called “at least as rapidly” rule (ALAR Rule ) applies where a deceased owner dies on or after their RBD and the beneficiary is a DB, which means that the DB is required to take annual RMDs, each year (Years 1 through 9), before liquidating the account in full no later than the end of the calendar year containing the tenth (10th) anniversary of the participant’s death, rather than taking nothing during Years 1 through 9 and waiting to take a lump sum liquidating distribution by December 31 of Year 10. The Preamble to the Final Regulations discusses this point in depth and purports to explains IRS’ interpretation that the ALAR Rule applies in this context.
Applicable Age for RMDs: Lifetime RMDs are not required until the owner reaches his or her RBD, which is now referred to as the “Applicable Age.” The Applicable Age is based on the year in which the owner was born and is the age at which an RMD is first required. While complicated, the Applicable age can be broken down as follows:
Participants born before July 1, 1949: 70½
Participants born on or after July 1, 1949 but not after December 31, 1950: 72
Participants born in 1951 through 1959: 73
Participants born after 1959: 75
Remember that the terms employees, owners, and participants are synonymous.
Upon attaining the Applicable Age and RBD, the RMD must be taken by April 1 of the year after the year in which the Applicable Age was attained.
The Applicable Age may be different for 401(k) participants: if you are not retired and do not own more than five (5) percent of the employer then the RBD is April 1 of the year after the year of retirement. This is another potential advantage of 401(k) accounts over IRAs!
And remember that, for Roth IRAs and Roth 401(k)s, as of January 1, 2024, the RBD does not exist.
More SECURE Background: The term EDB is a new term under SECURE. Not all beneficiaries are DBs, but all EDBs are DBs. In other words, to be an EDB, the EDB must be a DB. An EDB is a class of DBs (See below).
This is important as, under SECURE, an EDB may take RMDs based on their remaining life expectancy (the Life Expectancy Rule, if you will), which may afford DBs of accounts whose owner died before their RBD a longer “Outer Stretch” period than under the 10-Year Rule (except where the decedent owned a governmental defined contribution plan, in which case the effective date for SECURE’s RMD rules is deaths on or after January 1, 2022 rather than January 1, 2020).
As mentioned above, a couple of other key takeaways under SECURE 2.0 are surviving spouses being able to elect to take RMDs beginning in the year in which the deceased spouse would have attained their RBD and base those RMD amounts on the surviving spouse’s own life expectancy under the Uniform Life Expectancy Table, and DRACs no longer having lifetime RMDs as of tax year 2024 forward.
Whether the Death is Pre-RBD or Post-RBD is Important under the Final RMD Regulations
Where the Beneficiary is an Eligible Designated Beneficiary
As mentioned in Ryan’s previous article on this blog, EDBs include:
The surviving spouse.
A minor child of the participant. The term minor child means a child of the deceased participant who, as of the date of the deceased owner’s death, had not reached the age of majority (21 years old, not 18), and includes a stepchild, an adopted child, and an eligible foster child.
A disabled individual.
A chronically ill individual.
NOTE: The final RMD rules as to disabled or chronically ill (D/CI) individuals are complex and beyond the scope of this “brief” blog article. What is perhaps the key point as to D/CI EDB status is that the determination of whether a beneficiary qualifies as a D/CI EDB must be made as of the date of the deceased participant’s death, not later. In short, the beneficiary must be able to prove that he or she qualifies as D/CI as of the date of death, and must provide this written documentation to the custodian/plan administrator by October 31 of the calendar year after the deceased participant’s calendar year of death.
If your child or another proposed IRA beneficiary may be a D/CI beneficiary, it is imperative that you discuss this with your estate planning attorney, not only because of the potential IRA planning strategies that may be available but also because a D/CI beneficiary inheriting property may impact the D/CI beneficiary’s potential future eligibility for means-tested government benefits, such as Supplemental Security Income (SSI).
An individual who is not more than 10 years younger than the owner. Whether the beneficiary is not more than 10 years younger than the owner is calculated as of the beneficiary’s actual date of birth and not the beneficiary’s actual age at the end of the calendar year of the deceased owner’s death. It should be noted that a beneficiary who is older than the deceased owner is an individual who is not more than 10 years younger than the owner and, as such, an individual who is older than the deceased owner is an EDB.
The SECURE Act's final regulations clarify the Required Minimum Distributions (RMDs) for Eligible Designated Beneficiaries (EDBs) and other beneficiaries after a participant’s death.
RMD Guidelines for EDBs
Life Expectancy Payout if the participant died before the RBD: EDBs must take distributions over their life expectancy, with the first RMD due by December 31 of the year following the participant's death.
ALAR Rule or Ghost Rule Payout if the participant died on or after RBD: RMDs must be calculated based on the life expectancy of either the participant or the EDB, depending on who was younger at the time of death. This is an example of the pesky ALAR Rule.
Special Provisions for Spouses and Minors:
A sole spousal EDB can defer RMDs until the later of December 31 of the year after the participant's death or December 31 of the year the participant would have attained his or her Applicable Age. Unless prohibited by the plan, if the first spouse dies before their RBD, the surviving spouse is deemed to have elected to take RMDs calculated under the Uniform Life Table.
WARNING: It is critical for a surviving spouse to meet with the estate planning attorney and CPA as soon as possible, before making any decisions or signing documentation with the custodian/plan administrator, such as agreeing to a rollover.
A minor child of the participant reaches the age of majority at age 21 and must distribute the account in full by December 31 of the tenth (10th) year after reaching that age unless they otherwise qualify as an EDB (i.e., by virtue of being D/CI by following the rules on time). The 10-Year Rule kicks in after December 31 of the calendar in which the child turns 21 years old.
RMD Requirements for Other Beneficiaries
Designated Beneficiaries (not EDBs):
If the participant died before their RBD, the entire account must be distributed by December 31 of the tenth (10th) year from the deceased owner’s year of death. No annual RMDs required until Year 10.
If the participant died on or after their RBD, RMDs must follow the life expectancy method (ALAR Rule or Ghost Rule payout), and the account must be distributed in full by the tenth (10th) year after the participant's death.
No Designated Beneficiary: For nonliving entities (i.e., estates, charities):
If the participant died before their RBD, the account must be distributed by December 31 of the fifth (5th) year from the deceased owner’s year of death. No annual RMDs required until Year 5.
If the participant died on or after their RBD, RMDs continue based on the deceased participant’s life expectancy.
For example, if the deceased owner died on October 10, 2024, the end of the tenth (10th) calendar year from that date would be December 31, 2034. The end of the fifth (5th) calendar year from that date would be December 31, 2029.
See-Through Trusts
The Final Regulations maintain the see-through trust concept, which must follow known, specific requirements:
The trust must be valid under state law;
The trust must be irrevocable upon the participant’s death.
The beneficiaries must be identifiable from the trust document.
Required, appropriate documentation must be submitted to the custodian/plan administrator, such as a complete copy of the trust document or a list of the identifiable beneficiaries.
If the trust complies with the above requirements, the trust should qualify as a see-through trust and obtain DB status. If the trust flunks any of these requirements, the trust will not be a see-through trust, and the 5-Year Rule applies.
Whether a see-through trust obtains a 10-year payout or longer payout and the amount of any required RMDs depends on several complicated factors, including but not limited to the following:
Whether the see-through trust is a conduit trust or accumulation trust;
Whether a countable charity is disregardable;
Whether separate account treatment is applicable;
The ages of the countable beneficiaries who are not disregardable;
Whether a beneficiary is a minor child or a D/CI beneficiary;
Post-death actions by a beneficiary, as permitted under the terms of the trust document, such as the exercise of a power of appointment or trust modification;
Whether the trust is to qualify as a marital deduction trust for the surviving spouse;
Other potential factors.
Whether an IRA or other qualified retirement asset should, upon your death, be paid to a beneficiary outright and free of trust or in trust, and if in trust, which type of trust, is a complex estate planning conversation that involves questions as to the marital relationship, the family dynamic, estate tax, income tax, asset protection, charitable intent, and other factors, and is best had with an experienced estate planning attorney who has a solid grasp of SECURE and the Final Regulations.
