SECURE Act proposed rules for successor beneficiaries
I’ve read thru Ed Slotts description of the proposed reg rules for IRAs under the SECURE Act, and I think I got everything ok except for one point which I can’t seem to clarify, so thought I might ask here.
DB = Designated Beneficiary
EDB = Eligible Designated Beneficiary
NDB = Non-person designated Beneficiary
My question is successor beneficiary.
Ed Slott in his article said
“With the SECURE Act, the successor beneficiary’s distribution obligations do not depend on the original beneficiary’s RMD obligations, but instead depend on the original IRA owner’s age at death.”
Ok…but exactly does this mean?
If the successor is an EDB and the original IRA owner died prior to their RBD, how will this differ from the DB Successor?
And if death of original IRA owner was on or after RBD, how would the RMD requirements for these two differ. And just to reaffirm, the rules affecting RMDs for the original beneficiary don’t matter here….correct?
(clearly, a NDB would no apply because non-persons don’t die)
Thanks
BruceM
Permalink Submitted by Alan - IRA critic on Sat, 2022-04-16 21:31
Bruce, there are so many variables with the Secure Act proposed Regs that most likely everyone will be confused. The IRS needs to scale this back somewhat given the poor job of beneficiary RMD oversight in the past, and now we face double the complexity.
A successor beneficiary does not qualify as an EDB because a successor beneficiary is not a DB.
Ed’s quoted statement regarding the original owners’s age at death refers to the fact that if that owner passed post RBD, the successor beneficiary will be subject to BOTH the 10 year rule and annual LE RMDs in years 1-9. These annual RMDs simply continue the RMD schedule of the now deceased beneficiary in the same manner as pre Secure (as if deceased beneficiary was still living). It may take some time for the successor to discern the age of the original owner, who may have passed decades ago and may not be well known to the successor beneficiary.
If the original owner passed prior to RBD, there will be no annual RMDs for the successor beneficiary, just the 10 year rule.
One of the more complex of the proposals deals with an older beneficiary inheriting a plan when the plan owner passed after RBD. In this situation, the beneficiary would be an EDB (not more than 10 years younger), but RMDs would be based on the decedent’s younger age. However, such beneficiary would be required to drain the account in the year that a phantom divisor using the beneficiary’s age (not the owner) drops to 1 or less. Therefore, if that beneficiary was considerably older than the owner, they would not be able to stretch the account for long. Then, when this older beneficiary passes the account to the successor beneficiary, the successor beneficiary will have to drain the account when the EDB would have. Am sure someone will come up with a name for this termination year if this provision even survives.
An EDB can opt out of LE and into the 10 year rule, but ONLY if the owner passed prior to RBD. Such an election by the EDB would bind any successor beneficiary to the same 10 year period.
There are plenty more. Currently, pundits are unlikely to be publishing much on this subject pending the final Regs. At that point it will still be challenging to organize the results in a useable form.
Permalink Submitted by BruceM on Sat, 2022-04-16 23:14
I don’t get it.IRAs are ubiquitous. Its estimated about 80% of households have either IRAs and or employer retirement plans which means at retirement, they will likely roll over their employer plan balance to their IRA. Thus, these new rules apply to a large percent of the population. Why are these regulations that will affect so many so darn difficult??
Permalink Submitted by Alan - IRA critic on Sun, 2022-04-17 00:26
I think it is a lack of practical common sense. Initially, many thought that the 10 rule, while eliminating much of the stretch was fairly simple, however the proposed outcome is just another set of requirements stacked on top of the pre Secure regime, which itself was poorly enforced, particularly inherited accounts.
Note that the Secure Act applies equally to non IRA DC plans such as the 401k, 403b and 457 accounts, although the post death provisions did not kick in for govt plans until 1/1/2022. Therefore, all families with any retirement savings in these plans will eventually be affected as family members pass. The Secure Act has also clamped down the distribution period when benefits are left to a trust, particularly an accumulation trust.