What you need to know about the SECURE Act, the SECURE 2.0 Act and the recent finalized regulations, including Inherited IRA Beneficiary RMDs and the 10-year rule.
The U.S. retirement system is facing a critical juncture. With most workers required to supplement Social Security with personal savings, the system’s shortcomings have become increasingly apparent. Recent data from the U.S. Bureau of Labor Statistics indicates that only 56% of employees participated in a workplace retirement plan in 2023 (1). This participation rate is alarmingly low, considering the importance of financial security in retirement.
The challenges are multifaceted: Pensions are shrinking, savings rates are insufficient, and the costs of living continue to outpace wage growth. Additionally, the potential for cuts to Social Security benefits looms, threatening to disproportionately affect low-income retirees. These structural issues, such as increasing costs, underfunded retirement plans, and an aging population, will only worsen without significant reform.
Signed into law on December 20, 2019, as part of an end-of-year appropriations act, The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, intended to make it easier for Americans to save money in retirement, by allowing them to invest more money in tax-advantaged accounts and withdraw it later. It also made it easier for small businesses to set up 401(k) plans for their employees and expanded the range of investment options.
The SECURE 2.0 Act, enacted as part of the Consolidated Appropriations Act of 2023, updated the 2019 SECURE Act by expanding the provisions aimed at enhancing retirement savings. It contained over 90 changes to retirement plan and tax law, such as increasing the age for required minimum distributions, reducing penalties, and offering even greater flexibility for withdrawals. These changes reflect a growing recognition of the need for a more adaptable approach to retirement planning, acknowledging longer life expectancies and evolving retiree needs.
Following the passage of the SECURE Act and the SECURE 2.0 Act, the IRS has issued multiple pieces of comprehensive guidance to clarify the new regulations and provisions. This guidance has addressed the enhanced tax credits for retirement plans, new rules for disaster distributions, changes to Required Minimum Distributions (RMDs) for account owners and beneficiaries, and exemptions to the early distribution tax. These clarifications are crucial for retirement plan administrators and participants to understand the implications of the Act and ensure compliance with the new rules.
In response to the need for updated guidance and corrections, the Internal Revenue Service (IRS) has recently released new, final regulations. These updates reflect the latest legislative changes, including those from the SECURE Act and the SECURE 2.0 Act, which have significant implications for retirement plan participants, IRA owners, and their beneficiaries.
Some of the key highlights from the most recent regulations are:
The applicable Required Minimum Distribution (RMD) start date for a retirement account owner or participant is:
70 ½, if born before July 1, 1949
72, if born on or after July 1, 1949, but before January 1, 1951
73, if born on or after January 1, 1951, but before January 1, 1959
75, if born on or after January 1, 1960
(However, an account that has been left in an employer’s retirement plan account can use age 70 ½ as the RMD start date, regardless of the participant’s birth date.)
When a retirement account owner with a date of death of January 1, 2020, or later and after reaching their RMD start date, the beneficiary is faced with specific distribution requirements. The IRS finalized that non-spouse beneficiaries take at least an annual RMD based on their life expectancy for the first nine years following the account owner’s death. The inherited IRA must be fully depleted by the end of the 10th calendar year following the original account owner’s death.
The confusion surrounding the RMD regulations has been a significant issue for beneficiaries of inherited retirement accounts. While many interpreted the rule differently, the IRS has clarified that beneficiaries are indeed required to take annual RMDs. The IRS’s final regulations have incorporated changes from the SECURE and SECURE 2.0 Acts, ensuring that the rules are clearly understood and followed. To assist those affected by the confusion, the IRS waived the RMD requirement for the years 2022, 2023, and 2024, providing temporary relief for beneficiaries as they adjust to the new regulations.
When a non-spouse beneficiary is age 73 or older when they inherit the retirement account, older than the original account holder and the original account owner had reached their RMD start date before their death, the inherited IRA must be depleted over the longer of the beneficiary’s life expectancy or the original account owner’s life expectancy. This ensures that the account is depleted over a set period, aligning with the life expectancy payout method. Annual RMDs are required and, due to life expectancy payout, no balance should remain in the IRA to be distributed in year 10.
A surviving spouse who is the sole eligible designated beneficiary of an Inherited IRA is allowed to defer annual RMD distributions until the original account owner’s RMD start date and elect to have the RMD’s calculated using a more favorable actuarial table that uses the original account owner’s life expectancy.
When a surviving spouse is the sole eligible beneficiary of an inherited IRA, they have several options for managing the account. They can either treat themselves as the beneficiary, which allows them to defer RMDs until the original account owner’s RMD start date and use the original account owner’s life expectancy for calculating RMDs which may result in favorable annual distributions, or they can roll it over into their own IRA.
If the original account owner did not take their RMD in the year of their death, the beneficiaries are required to withdraw the RMD by December 31 of the year following the account owner’s death. This distribution must be reported on the beneficiary’s tax return. It’s important to note that this account owner’s RMD distribution is in addition to the year 1 RMD that the beneficiary is required to take.
When a Trust is named as a beneficiary of a retirement account, a “separate account rule” has been created to establish subtrusts for individual beneficiaries. Under the original provisions, the requirement for individual subtrusts to be named directly on beneficiary designation forms posed a challenge, as many account custodians were not equipped to handle such designations. However, with the IRS’s clarification, the process has been streamlined, allowing the naming of the main trust on the designation forms, with the ability to establish subtrusts subsequently for RMD calculations. This adjustment provides greater flexibility, ensuring that the benefits of retirement accounts can be distributed in accordance with the account owner’s wishes while complying with tax regulations.
If the beneficiaries of the Trust are multiple minor children, the final regulations implement more favorable rules for calculating RMDs. Under these regulations, the RMDs for such trusts can be calculated based on the age of the youngest beneficiary. This means that the commencement of the 10-year depletion requirement for the retirement account is deferred until the youngest beneficiary reaches the age of 21. Consequently, all beneficiaries can benefit from a prolonged deferral period, potentially allowing for more growth within the trust’s retirement accounts.
The SECURE Act and the SECURE 2.0 Act have introduced significant changes to retirement planning, particularly affecting trusts and retirement accounts. It’s crucial for individuals with such arrangements to understand the implications of these legislative updates. Given these complexities, it’s wise to seek professional advice to ensure that estate plans remain aligned with the new rules and that retirement savings are optimized under the updated framework. Legal and financial professionals can provide personalized guidance to navigate these changes effectively. Call or click today to schedule an appointment with an experienced attorney at Great Lakes Family Probate & Estates PLLC.
1. Statistics, U.S. Bureau of Labor. Economics News Release. Table 1. Retirement Benefits: Access, Participation, and Take-Up Rates. [Online] https://www.bls.gov/news.release/ebs2.t01.html.