SECURE Act: Modification of Required Minimum Distribution Rules for Designated Beneficiaries (Section 401)

Based on the new provisions of the SECURE Act, there are now much more restrictive rules surrounding a required minimum distribution (RMD) to designated beneficiaries of retirement accounts. Under the updated rules, most non-spouse IRA and retirement plan beneficiaries will have to take distributions from inherited retirement accounts within 10 years after the account owner’s death.

Prior to the Secure Act, RMD rules permitted non-spouse beneficiaries to take distributions from an inherited IRA or retirement plan over their life expectancy beginning with the year following the year the account owner died. As such, to the extent an individual inherited an IRA from a grandparent, there existed the ability to draw out or stretch the distributions over an extended period. For example, if you inherited an IRA at the age of 40, the current IRS life expectancy table says you have 43.6 years to live. Therefore, you must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your remaining life expectancy as of the end of the current year. Your second RMD would equal the account balance as of the end of the following year divided by 42.6, and the pattern would continue until the account balance was depleted.

The new 10-year distribution rule significantly limits the stretch IRA strategy outlined above. It can still work, but only in the limited circumstances when the 10-year rule does not apply.

The Secure Act’s RMD change will not affect accounts inherited by a so-called eligible designated beneficiary, namely one who is: (1) the surviving spouse of the deceased account owner, (2) a minor child of the deceased account owner, (3) a beneficiary who is no more than 10 years younger than the deceased account owner, or (4) disabled or chronically ill individuals.

The new 10-year rule generally applies regardless of whether the account owner dies before or after his or her RMD required beginning date. Following the death of an eligible designated beneficiary, the account balance simply must be distributed within 10 years. Further, when an account owner’s child reaches the age of majority under applicable state law, the account balance must be distributed within 10 years after that date.

Effective date: The Secure Act’s RMD change is generally effective for RMDs taken from accounts whose owners die after 2019. RMD rules for accounts inherited from owners who died before 2020 remain unchanged.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC).  SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services.  Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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