Details of New Spousal RMD Elections Post Secure Act 2.0

by Prof. Robert Bloink and Prof. William H. Byrnes

Surviving spouses have always been granted special privileges when they inherit retirement accounts from a deceased spouse. Rather than being stuck with rigid distribution rules, surviving spouse beneficiaries have always had options. Those privileges continue, although they have been modified significantly under the SECURE Act 2.0, which permits a surviving spouse beneficiary to elect to be treated as the original plan participant for required minimum distribution (RMD) purposes. The IRS final and proposed regulations have now significantly fleshed out the SECURE Act changes to the RMD rules—meaning that advisors should pay close attention to the details to ensure clients understand all of their new obligations and options for 2024 and beyond.

SECURE 2.0 Background

Under the SECURE Act 2.0 when a surviving spouse is designated beneficiary of a defined contribution plan, the surviving spouse is entitled to elect to be treated as the plan participant for all RMD purposes. When the surviving spouse makes this election, they are entitled to stretch distributions over their own life expectancy.

The surviving spouse is also entitled to delay RMDs until the original participant’s required beginning date and, should they die before required distributions start, the surviving spouse will be treated as though they were the original participant.

Final and Proposed SECURE Act Regulations

Under the regulations, the surviving spouse will automatically be treated as the participant (without the need to make a special election) if all of the following are true: (1) the surviving spouse is the sole beneficiary, (2) the original participant died before their required beginning date and (3) the surviving spouse will receive payments under the life expectancy rule (rather than the ten-year rule).

If the original participant died after their required beginning date, the surviving spouse must make a separate election to be treated as though they were that participant.

The proposed regulations released concurrently with the final regulations flesh out the spousal rules post-SECURE 2.0. This election is only available when the surviving spouse’s first RMD would be in 2024 or later. In other words, if the original participant would have reached their required beginning date in 2024 or later, the spousal election is permitted.

Whenever an election to be treated as the original participant is in effect, the Uniform Lifetime Table factor will be used to determine the amount of the surviving spouse’s RMDs up until the year of the surviving spouse’s death. Generally, this will result in smaller annual RMDs when compared to use of the Single Life Table.

Also assuming an election to be treated as the original participant is in effect, upon the surviving spouse’s death, that spouse’s beneficiary must continue to receive distributions based on that spouse’s remaining life expectancy using the Single Life Table if the surviving spouse dies on or after the date they have begun to receive required distributions. The factor is determined using the surviving spouse’s remaining life expectancy in their year of death (based on age), and then reducing that by one for each subsequent year. The surviving spouse’s beneficiary has ten years to empty the account (i.e., they are not treated as an eligible designated beneficiary).

The proposed regulations also propose that, although the spousal election allows the spouse to be treated as the participant for purposes of the RMD regulations, that treatment does not apply in all situations. It would, however, apply so that the spouse would not be subject to the 10% early withdrawal penalty for pre-age-59 ½ distributions. The surviving spouse’s RBD would also be determined by reference to the original participant’s age, rather than the surviving spouse. The proposed regulations also provide that when determining the account balance for RMD purposes, all amounts held in a designated Roth account and any other account under the plan are included for purposes of calculating the RMD for the year.

Conclusion

The rules governing spousal elections under the final and proposed regulations are complicated, but also allow a surviving spouse significant flexibility when inheriting a defined contribution plan. However, because the final regulations left a significant portion of the guidance to proposed regulations, interested parties will have an opportunity to comment on the various proposals—meaning that individuals should stay tuned for further guidance.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.