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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Secure 2.0 Adds RMD Flexibility for Surviving Spouses

By Roger Wohlner

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What You Need to Know

  • Secure 2.0 has added options for surviving spouse beneficiaries to be treated as the deceased spouse when inheriting IRAs from their late spouse.
  • This option allows the surviving spouse to use the more advantageous Uniform Lifetime Table to calculate RMDs from the deceased spouse’s IRA.
  • The new rules could be particularly beneficial if the younger spouse dies first or the surviving spouse remarries.

The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act has many aspects that are beneficial to your clients in terms of retirement planning and related areas. One area that may benefit some clients is changes in the rules for surviving spouses who inherit retirement accounts from their deceased spouses. This aspect of the legislation can offer planning benefits for some of your clients when these changes commence in 2024.

Surviving Spouse Beneficiaries

The rules in place prior to Secure 2.0 have long been favorable to those inheriting IRAs and other retirement accounts from their spouse. They were exempt from the limitations on the stretch IRA on most non-spousal beneficiaries arising from the original Secure Act rules that went into effect in 2020.

Surviving spouses have several options, including keeping the account as an inherited IRA and taking distributions over their lifetime, using the five-year rule or treating the IRA as their own.

New Rules Under Secure 2.0

Under Secure 2.0, the surviving spouse can elect to be treated in the same fashion as the deceased spouse. This choice, which becomes available in 2024, allows for some additional options in addition to those currently available:

  • Required minimum distributions for the surviving spouse will be delayed until the deceased spouse would have reached the age at which RMDs would have commenced had they lived — age 73 or 75, depending upon their birth year.
  • Once the RMDs for the decedent would need to commence, they would be calculated using the IRS Uniform Lifetime Table versus the Single Life Expectancy Table that is currently required for the surviving spouse and other beneficiaries. The Uniform Lifetime Table will result in a lower RMD calculation.
  • If the surviving spouse dies before RMDs begin on the deceased spouse’s IRA, then the surviving spouse’s beneficiaries would be treated as if they were the original beneficiaries of the original account holder. This would allow any of these beneficiaries who could be classified as eligible designated beneficiaries under the original Secure Act to stretch distributions over their life expectancy versus having to take distributions under the 10-year rule.

Younger Spouse Dies First

It looks like a major benefit of the new rules for surviving spouses will occur when the surviving spouse is older than the deceased spouse. Like many of the provisions of Secure 2.0, there are details that need to be sorted out and that will need additional clarification, but initial interpretations suggest this change could be beneficial for your clients.

Under this scenario, the older surviving spouse could wait until the deceased spouse would have reached the age where they were required to begin their RMDs. This would allow them to let the assets in the deceased spouse’s IRA continue to grow tax-deferred.

Here is an example of how this might work: Your clients are a married couple, Mary, age 56, and Henry, age 61 as of Jan. 1, 2024. Mary dies on Jan. 27, 2024. Mary’s RMDs would have commenced in 2042 — the year she would have turned 75 had she lived.

If Henry keeps Mary’s IRA as a separate account and the balance grows to $2 million by 2042, the first-year RMD would be $2 million divided by 22.9, or $87,336 using the Uniform Table. The RMD using the smaller factor in the Single Life table for age 75 would be $135,135. This is a difference of $47,799.

If Henry doesn’t need the money from Mary’s RMDs to fund his own retirement, he can let the money grow inside her IRA.

Here is a hypothetical look at the five years of RMDs of Mary’s account if taken under the Uniform table or the Single Life table.

Mary’s age if she had survived Account Balance for RMD RMD – Uniform Lifetime Table RMD – Single Life Table Difference
75 $2.0 million $87,336 $135,135 -$47,799
76 $2.1 million $95,455 $148,936 -$53,481
77 $2.3 million $108,491 $172,932 -$64,441
78 $2.4 million $118,227 $190,476 -$72,249
79 $2.3 million $117,949 $193,277 -$75,328
Total $527,458 $840,756 -$313,298

While these numbers are hypothetical, they illustrate the advantage of being able to use the Uniform Lifetime Table versus the Single Life Expectancy Table for calculating the RMDs. Under the current rules, Henry might have taken Mary’s IRA account as his own. The RMD amounts might have differed a bit, but the advantage of being able to use the Uniform Lifetime Table for the RMDs from Mary’s IRA would still be very real.

For clients who find themselves in this situation, the advantages can be significant. Delaying the RMDs on the younger deceased spouse’s IRA can allow the IRA account to grow tax-deferred over time. This can add up to significant additional assets for the surviving spouse in the years between the account owner’s death and the date when RMDs must begin, depending upon the account owner’s age at death.

Other Planning Options

Though the scenario where the younger spouse dies first and the older surviving spouse treats the inherited IRA as the deceased spouse’s seems to be the one receiving a lot of early press, the ability to treat the deceased spouse’s IRA as theirs for RMD purposes does create several potential planning options.

Regardless of the age difference, the surviving spouse will benefit from the ability to use the Uniform Lifetime Table to take RMDs from the deceased spouse’s IRA. The RMDs will always be lower at any age. They can always take a larger distribution from this account if needed at any point.

There are a number of circumstances a surviving spouse should consider in making decisions around their own IRA and that of their late spouse. These factors could include:

  • The relative size of the two accounts
  • Whether the surviving spouse remarried
  • The surviving spouse’s tax bracket
  • Secondary beneficiaries of the deceased spouse.

Having the two IRAs can offer the surviving spouse a level of planning flexibility. For example, they could take RMDs from the deceased spouse’s IRA at the lower rates available under the Uniform Lifetime Table while doing periodic Roth conversions with their own IRA over time. This will offer tax diversification and will also allow them to leave their Roth IRA to non-spousal beneficiaries tax-free as long as they meet the five-year rule prior to their death.

As with any client, whether or how much they convert will depend on a number of factors including the client’s tax situation.

Qualified charitable distributions (QCDs) are another option to consider. If the surviving spouse is charitably inclined and doesn’t need some or all of the RMDs from their own IRA account, they might consider doing QCDs to satisfy some or all of the RMDs on their own account while taking RMDs from the deceased spouse’s IRA where they have elected to treat it as if they were the deceased spouse for RMD purposes.

If the Surviving Spouse Remarries

Treating the deceased spouse’s IRA as if they were that spouse for RMD purposes offers a remarried surviving spouse some estate planning options.

Keeping the IRA separate and treating it if it was still the deceased spouse’s for RMD purposes allows the original beneficiaries to be treated as eligible designated beneficiaries, where this status is applicable, should the surviving spouse die prior to commencing RMDs. Beyond the benefits this status brings in terms of avoiding the 10-year rule, keeping this account separate allows the assets to be kept out of the surviving spouse’s new marriage.

The surviving spouse could make their new spouse a beneficiary of their own IRA and other retirement plans, all or in part, while using the deceased spouse’s IRA to benefit children or other relatives connected to their first marriage.

If the surviving spouse’s new spouse is also a widow or widower, the new spouse might find themselves in the same position with a deceased spouse’s IRA. The new spouse could use their former spouse’s IRA to take RMDs using the Uniform Lifetime Table at a more preferable rate. Additionally, the new spouse could use their former spouse’s IRA to benefit children or other heirs connected to their prior marriage, while putting their new spouse on their own IRA as a beneficiary.

Summary

The new rules regarding the treatment of a deceased spouse’s retirement account offer some potentially beneficial planning options for some clients. The ability to take RMDs as if the surviving spouse was the deceased spouse can be quite beneficial when the older spouse is the survivor. It will likely be beneficial in many other cases regardless of the age difference.

The flexibility from a beneficiary-naming standpoint between the deceased spouse’s IRA and the surviving spouse’s account offers some additional planning options. The ability for eligible designated beneficiaries to stretch their benefit from the deceased spouse’s IRA can be useful where applicable. And, of course, the ability to use the Uniform Lifetime Table for the RMDs from the deceased spouse’s IRA can serve to reduce the level of RMDs significantly.

These new rules don’t come into effect until 2024, but it’s not too early to get up to speed to be able to use this option to help your clients in this type of situation in the future. Hopefully, the details of some aspects of these new surviving spousal rules will be clarified by the time they become effective.

Roger Wohlner

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