New IRS RMD Regulations Bring a New Twist to Successor Beneficiaries

What do you want to know

  • Successor beneficiaries may be required to take annual RMDs over the 10-year payout period, but it may be unclear which rule applies.
  • For eligible designated beneficiaries who are not subject to the 10-year rule, the pre-Secure Act life expectancy allocation method remains available.
  • The successor beneficiary’s distribution obligations depend on the age at death of the original account holder, not the initial beneficiary’s RMD obligations.

The proposed new RMD regulations could create headaches for successor beneficiaries of legacy retirement accounts. A successor beneficiary is a person who inherits a retirement account from the beneficiary of the original retirement account holder.

After the Security Act, it was clear that the successor beneficiary could not simply step into the original beneficiary’s shoes – which means that a separate analysis is needed to determine how quickly the successor beneficiary should empty the account of retirement after inheritance.

Under the proposed regulations, the successor beneficiary may or may not be required to receive the required annual minimum distributions over the 10-year payout period – but it will likely be unclear which rule applies, making it more important than ever for advisors to keep detailed records. and watch for upcoming clarifications from the IRS.

Secure Act Changes to Legacy IRA Distribution Rules: Background

Under the previous law, non-spouse beneficiaries could receive distributions from an inherited retirement account either over a five-year period or using the beneficiary’s life expectancy – to “stretch” the benefits of deferral. tax on the lifetime of the next generation. The Secure Act has limited the value of the stretch for most taxpayers who do not qualify as “eligible named beneficiaries”.

After the Security Act, most designated account beneficiaries will be required to receive distributions over a 10-year period, unless the beneficiary qualifies as an eligible designated beneficiary.

Eligible named beneficiaries who are not required to use the “10-year rule” for distributions (meaning the pre-Security Act life expectancy distribution method remains available) include spouses survivors, disabled beneficiaries, beneficiaries with chronic illnesses, children of the account holder who have not reached the “age of majority” and persons who are no more than 10 years younger than the original account holder.

Before the Secure Act became law, someone who inherited a retirement account from a named beneficiary (rather than the original account holder) would simply continue to take distributions from the account on the same schedule as the beneficiary. initial followed. In other words, distributions from the successor beneficiary were generally supported over the remaining life expectancy of the original beneficiary (even after the death of that original beneficiary).

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