What You Need to Know
- Successor beneficiaries may be required to take annual RMDs over the 10-year payout period, but determining which rule applies can be tricky.
- For eligible designated beneficiaries who are not subject to the 10-year rule, the pre-Secure Act life expectancy distribution method remains available.
- The successor beneficiary’s distribution obligations depend on the original account owner's age at death, not the original beneficiary’s RMD obligations.
The new proposed RMD regulations could create headaches for successor beneficiaries of inherited retirement accounts. A successor beneficiary is someone who inherits a retirement account from the beneficiary of the original retirement account owner.
Post-Secure Act, it was clear that the successor beneficiary couldn’t merely step into the shoes of the original beneficiary — meaning that a separate analysis is required to determine how quickly the successor beneficiary must empty the retirement account post-inheritance.
Under the proposed regs, the successor beneficiary may or may not be required to take annual required minimum distributions over the 10-year payout period — but determining which rule applies will likely be tricky, making it more important than ever for advisors to keep detailed records and watch for forthcoming clarity from the IRS.
Secure Act Changes to Inherited IRA Distribution Rules: Background
Under prior law, non-spouse beneficiaries could take distributions from an inherited retirement account either over a five-year period or using the beneficiary’s life expectancy — to “stretch” the tax deferral benefits over the lifetime of the next generation. The Secure Act limited the value of the stretch for most taxpayers who do not qualify as “eligible designated beneficiaries.”
Post-Secure Act, most designated account beneficiaries will be required to take distributions over a 10-year period, unless the beneficiary qualifies as an eligible designated beneficiary.
Eligible designated beneficiaries who are not required to use the “10-year rule” for distributions (meaning that the pre-Secure Act life expectancy distribution method remains available) include surviving spouses, disabled beneficiaries, chronically ill beneficiaries, the account owner’s children who have not reached “the age of majority”, and individuals who are not more than 10 years younger than the original account owner.
Before the Secure Act became law, someone who inherited a retirement account from a designated beneficiary (rather than the original account owner) would simply continue to take distributions from the account according to the same schedule the original beneficiary was following. In other words, the successor beneficiary’s distributions were typically taken over the remaining life expectancy of the original beneficiary (even after that original beneficiary had died).