SECURE Act: New Required Minimum Distribution Rules for Beneficiaries


August 13, 2022

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) as part of the Further Consolidated Appropriations Act, 2020, effective 1/1/2020. 

Repeal of the Maximum Age for Traditional IRA Contributions

Starting in 2020, an individual of any age can make contributions to a traditional IRA as long as they have compensation (earned income, wages or self-employment income). Prior to 2020, an individual was not allowed to make any more contributions to traditional IRAs once they reached age 70 ½.

The repeal of the age 70 ½ limit for IRA contributions allows individuals who work past age 70 ½ to continue to max out traditional IRA contributions, take the tax deduction and build retirement funds for when they are needed.

If you are approaching age 70 ½ but will not reach this age until after 2019, you can now delay taking your required minimum distributions (RMDs) (and the taxable income that comes with it) for another 1-2 tax years and continue to make tax-deductible contributions if you are still working.

Required Minimum Distribution Age Raised From 70 ½ to 72

Individuals who reach age 70 ½ after December 31, 2019, can now wait until age 72 to take their required minimum distribution. The old law required retirement plan participants and IRA owners to take distributions starting on April 1 of the year following the year in which they reached 70 ½.

The increase in age for taking RMDs under the Act is beneficial as it allows retirement plans to grow longer without being depleted by RMDs and it defers the recognition of taxable RMD distributions.

Participants in employer-provided retirement plans who do not own 5% or more of the company can still delay taking RMDs until April 1 of the year after the year they retire.

Qualified Charitable Deduction Exclusion

Prior law allowed up to $100,000 per year of qualified charitable distributions from a traditional IRA or Roth IRA to be excluded from tax.

The new law reduces the qualified charitable distribution exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after the taxpayer turns age 70 ½ over the amount of all prior year reductions. (This is confusing, so please speak to your tax advisor if you have questions.)

Partial Elimination of “Stretch” IRAs

Prior law allowed the owner of certain retirement plans to name a “designated” beneficiary, such as a son or daughter (or certain trusts for the benefit of a son or daughter), and after the death of the owner, the retirement plan could be paid out over the life expectancy of the son or daughter. Many of our clients use this technique to defer the income tax consequences of large IRAs. A designated beneficiary is defined as an individual or certain “see-through” trusts where life expectancy can be used to calculate the required minimum distributions when the owner dies.

The new law states that this so-called “stretch IRA” is no longer a possibility, and the maximum pay-out period is now limited to 10 years. The SECURE Act also added a new definition of beneficiary. All designated beneficiaries must withdraw benefits within 10 years following the owner’s death UNLESS the beneficiary meets one of the following exceptions, in which case they can still use the life expectancy payout:

  • A surviving spouse may still use life expectancy.
  • A minor child may use life expectancy until they reach the age of majority (generally 18 years of age) before the 10-year rule takes effect.
  • A disabled beneficiary may use life expectancy until death.
  • A chronically ill beneficiary may use life expectancy until death.
  • A beneficiary who is less than 10 years younger than the owner of the retirement plan may use life expectancy for pay-out until death.

The rules for beneficiaries who are NOT designated beneficiaries still apply, such as the 5-year rule for an estate named as a beneficiary, the rules for a charity, and rules for certain trusts that do not qualify as a see-through trust.

Updated life expectancy tables

On November 6, 2020, the IRS issued final regulations containing new life expectancy tables to be used for determining required minimum distributions (RMDs). These new tables are effective for RMDs beginning on January 1, 2022. The old tables will still apply for 2021 and no RMDs were required for 2020 due to the Coronavirus Aid, Relief and Economic Security (CARES) Act. After reviewing improvements in mortality since RMD life expectancy tables were last updated in 2002, the IRS provided for an overall moderate reduction of RMDs utilizing these newly updated tables.

The changes to the life expectancy tables are intended to allow for the retention of greater amounts in affected retirement plans (generally IRAs and Company plans), defer taxes a little longer and hopefully provide more retirement income to participants to account for generally longer life spans. The effective date for the new tables was delayed from 2021 to 2022 in the final regulations so account custodians and plan administrators would have enough time to update their computer systems which calculate the RMDs.

The three tables used to determine RMDs are:

  • The Uniform Lifetime Table is the table most used by plan owners. It is used to determine lifetime RMDs to most plan participants over the age of 72; including when a spousal beneficiary is a sole designated beneficiary but who is not over 10 years younger than the account owner or when the spouse is not the sole designated beneficiary. The Uniform Lifetime Table is also used to calculate distributions required for an individual who has inherited a tax deferred retirement account from their spouse and has selected to transfer the account into their own name.
  • The Joint and Last Survivor Table is only used to determine RMDs to plan participants over the age of 72 when a spouse is a sole designated beneficiary and who is over 10 years younger than the account owner.
  • The Single Life Table will be used by a newly defined class of beneficiaries called eligible designated beneficiaries. Eligible designated beneficiaries are defined as spouses, disabled or chronically ill individuals, minor children of the account owner/participant or someone who is no more than 10 years younger than the account owner/participant.

Accounts inherited at an account owner/participants’ passing before the SECURE Act went into effect on January 1, 2020, will continue to utilize the Single Life Table for distribution calculations and will also be affected by these updates to the tables. Finally, account owners/participants who died before January 1, 2020 and who failed to name a living beneficiary and who died after their required beginning date, will also use the Single Life Table.

Non eligible designated beneficiaries that inherit an account after January 1, 2020 (the effective date of the SECURE Act), no longer use the three tables listed above and are now instead subject to the new 10 year rule, whereby the funds are now required to be withdrawn by the end of the 10th year following the year within which the account holder dies.

The revised tables will also affect individuals receiving substantially equal periodic payments (SEPPs) from IRAs or company retirement plans to avoid the 10% penalty on pre age 59 ½ distributions. The IRS Life Expectancy Tables are also utilized in the calculations of the SEPP payment amounts and the updated tables will cause a reduction of the amount permitted to be withdrawn without penalty.

Naming beneficiaries

It is imperative that you understand what category your beneficiaries fit into as well as the related RMD rules that apply to them. Failure to do this could have significant impacts on your original plan.

  • If inherited prior to 2020 use “old” law. The rules discussed here under the SECURE Act do not apply to beneficiaries who inherited IRAs and/or qualified retirement accounts from account owners who died prior to January 1, 2020.
  • Naming beneficiaries is important. This helps ensure your plan assets will pass to the intended heirs, affects the distribution options available based on the beneficiary classification, and can help keep probate and estate costs down.
  • Eligible designated beneficiaries. This group is generally able to use the beneficiary life expectancy as they did under the pre-SECURE Act rules.
    • Surviving spouse
    • Person less than 10 years younger
    • Eligible minor child (see below for qualifications)
    • Disabled
    • Chronically Ill
  • Eligible minor child is not just any child. This is the original account owner’s children only. Grandchildren, nieces and nephews, for example, do not qualify as an EDB.
  • Be aware that two rules can apply to one beneficiary. Eligible minor children will begin taking distributions over their life expectancy, but this window is limited. Once they reach the age of majority, which is usually 18 or 21 (this varies by state and in some jurisdictions could extend to age 26 if they are still in school), the distribution rule changes to the 10-year rule.
  • Distributions may subject minor children to the “kiddie tax.” Children under 18 at the end of the year and certain children ages 18-23 are potentially subject to tax at their parent’s marginal tax rate on IRA distributions.
  • One-time treatment for EDB. Eligible beneficiary rules only apply at the death of the original account owner. Once the initial EDB dies, the inherited account must be paid out over 10 years from the EDB’s death.

Penalties can be severe. In addition to potential negative tax consequences, if the account has not been distributed by the end of the 5th or 10th year following the account owner’s death, any remaining funds are subject to a 50% penalty or “excise tax.”

RMD RULES UNDER THE SECURE ACT Designated Beneficiary Non-Designated Beneficiary
Direct Individual Conduit Trust Accumulation Trust IRA Owner Death Before 72 (RBD) IRA Owner Death After 72 (RBD)
Eligible Designated Beneficiary Surviving Spouse Life Expectancy Life Expectancy 10-Year
Person Less Than 10 Years Younger Life Expectancy Life Expectancy 10-Year
Eligible Minor Child Life Expectancy (Until majority, then 10-Year) Life Expectancy (Until majority then 10-Year) 10-Year
Disabled OR Chronically Ill Person Life Expectancy Life Expectancy Life Expectancy
Non-Eligible Designated 10-Year 10-Year 10-Year
Non-Designated Beneficiary 5- Year Ghost Life Expectancy

Trusts qualifying as eligible designated beneficiaries

While many people have a specific individual or individuals named as direct beneficiaries of IRAs and other retirement plans, there are various circumstances that may lend themselves to naming a trust as the beneficiary. These may include protection from creditors, naming additional beneficiaries, second marriages or blended family considerations, and controlling receipt of IRA proceeds by the beneficiaries (i.e., minor children).

The SECURE Act changed the timing of required minimum distributions for many beneficiaries of IRAs and other qualified plans. Trusts that were commonly set up to provide asset protection and manage tax consequences often will not result in the original desired outcome under the new laws.

Trusts having beneficiaries that do not meet the “eligible designated beneficiary” regulations under the SECURE Act are now presented with new complexities. These include potential loss of asset protection, younger beneficiaries receiving much more than anticipated in a shorter timeframe and significant tax ramifications that may be different than your intent and expectations.

Consider see-through trusts

Two types of trusts, a conduit trust and an accumulation trust (often called see-through trusts as they look through to the underlying beneficiaries), can qualify as eligible designated beneficiaries if properly structured, allowing either a 10-year or life expectancy distribution payout rather than the shorter 5-year payout rule. (The drafting details of these types of trusts play a very important role in comprehensive planning, so make sure you work with an advisor who specializes in this area.)

Conduit trusts are designed to force out IRA required minimum distributions (RMDs) to the trust beneficiaries when received. In other words, whenever a distribution is made from an IRA to the trust, the trustee must distribute the IRA proceeds to the trust beneficiary. The beneficiary will take this income into account for tax purposes at his or her individual income tax rates.

Another type of see-though trust is commonly referred to as an accumulation trust. An accumulation trust that gives the trustee discretion to determine when and how much trust income to distribute, including RMDs, provides the ability to balance the wishes of the account owner with the potential tax consequences to the trust and/or beneficiaries.

The SECURE Act does not change the function of a conduit trust or accumulation trust but can significantly shorten the timing of the distributions for certain beneficiaries. This, in turn, can completely overturn the careful estate planning that you did just a few years ago.

Understanding how your beneficiary designations work in combination with your will and any trusts you have created can have a major impact on how your wishes compare to what really happens after you are gone.

What you need to know

  1. Four criteria must be met to qualify a trust as an eligible designated beneficiary. A qualifying trust, commonly referred to as a see-through trust, will be able to use the entire stretch period, just as before and must:
    1. Be valid and legal under state law
    2. Be or become irrevocable upon the owner’s death
    3. Have identifiable individual beneficiaries who are designated beneficiaries
    4. Provide a copy of the trust document to the trust administrator no later than October 31 of the year following the year of the owner’s death
  2. IRAs payable to a qualifying trust for a minor beneficiary will be subject to dual payout rules. First, while the beneficiary is a minor, the trust will qualify as an eligible designated beneficiary with RMDs calculated on the minor’s life expectancy. Once that beneficiary reaches the age of majority, the conduit trust now switches to the 10-year payout rule. For example, if you live in a state where 18 is the age of majority, your entire IRA could be distributed to a current minor by the time they are 28.
  3. Applicable multi-beneficiary trusts (AMBTs) are trusts with multiple designated beneficiaries that include a chronically ill or disabled person. Properly structured, they allow the chronically ill or disabled trust beneficiary to use their life expectancy for payouts of the IRA. To qualify as an AMBT the trust would have to be established in one of two ways:
    1. It can provide that it is to be divided immediately upon the death of the IRA owner into separate trusts for each beneficiary.
    2. It can provide that no beneficiary, other than the eligible designated beneficiary, has any right to the IRA funds until the death of the eligible designated beneficiary.
  4. Trusts have high tax rates on minimal income. Income that is held in accumulation trusts quickly reaches the highest tax bracket with taxable income starting at $13,050 being taxed at 37% for 2021, while, for example, a single individual does not hit that same tax rate until taxable income is $523,601.
  5. Trust language can significantly impact your past planning. If you have a trust named as a beneficiary of an IRA, ROTH IRA or qualified plan, it is critical that these are revisited to ensure they still have the intended outcome based on the original planning.

Expansion of Section 529 Education Savings Plans

Retroactive to distributions made after December 31, 2018, plan funds may now be used for fees, books, supplies and equipment required for the designated beneficiary’s participation in an apprenticeship program. In addition, tax-free distributions of up to $10,000 are now allowed to pay the principal and interest on a student loan of the designated beneficiary or on a loan for a sibling of the designated beneficiary.

Change in the Kiddie Tax — Again

Back in 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made changes to the so-called “kiddie tax,” which is a tax on the investment income of children. Before the TCJA, the investment income of a child was taxed at the parent’s rate if the parent’s rate was higher. Under the TCJA, the income of the child was to be taxed according to the tax brackets applicable to trusts and estates (which reach the highest marginal tax rate at just over $12,000 of income). This rule seemed unfair, and so it has been re-written.

The new rules starting in 2020 (with the option to start retroactively in 2018 and/or 2019) tax the investment income of a child at the parent’s rate if the parent’s rate is higher, which is the pre-TCJA rule.

Penalty-Free Withdrawals From Retirement Plans for Expenses Related to the Birth or Adoption of a Child

Typically, distributions taken from a retirement plan prior to age 59 ½ are subject to a 10% withdrawal penalty (with some exceptions). Starting in 2020, retirement plan distributions up to $5,000 that are used for expenses related to the birth or adoption of a child are not subject to the 10% early withdrawal penalty.

Taxable Non-Tuition Fellowship and Stipend Payments Can Now Be Treated as Compensation

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes. Starting in 2020, such payments are now considered compensation, allowing students to begin saving for retirement right away by creating an IRA, which requires a level of compensation.

Impact on Nonprofit Organizations

The SECURE Act brings a couple of specific changes for nonprofits:

  1. Modification of the excise tax on net investment income from the two-tiered 1%/2% to a flat 1.39%
  2. Retroactive repeal of the increase in UBIT for certain fringe benefit expenses

Next Steps

As with any significant tax change, there are a lot of details to work though. Contact your local Armanino tax advisor at any time if you have questions or would like to discuss how the SECURE Act may impact your tax situation.

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