With SECURE 2.0 on the books, there are new opportunities for treating recipients of … [+]
SECURE 2.0 was enacted as part of the Consolidated Appropriations Act of 2023. It introduces a significant number of changes to retirement preparation, including contributions, simplicity of participation, and the date to start Required Minimum Distributions (RMDs). There is a significant new provision for the surviving spouse of a deceased participant in an employer retirement plan. The new law improves tax treatments for surviving spouses, especially those married to a younger spouse.
existing law. Under current law, when a surviving spouse inherits a retirement account from a deceased spouse, they have a variety of options available to them that are not available to any other beneficiary. In general, they can:
Roll over the deceased’s IRA or retirement plan to your own IRA
Treat the deceased’s IRA as your own, or
· Remain beneficiary of decedent’s IRA, but with special treatment
Each of these options offers certain advantages, depending on the ages and financial circumstances of both the surviving and deceased spouse.
New rule. Starting in 2024, SECURE 2.0 adds an important new option to the list of spouse-beneficiary options only by allowing the surviving spouse to choose to receive treatment What the deceased spouse.
Making this election would provide the following benefits to the surviving spouse:
- RMDs for the surviving spouse would be delayed until the deceased spouse has reached the age that RMDs begin (73 or 75, depending on the year of death);
- Once the decedent’s RMDs are required, the surviving spouse will calculate their RMDs using the uniform table for life used by account owners, instead of Unique board for life that applies to the beneficiaries, who have a longer life expectancy; Y
- If the surviving spouse dies before the RMD begins, the surviving spouse’s beneficiaries will be treated as if they were the original IRA beneficiaries. This would allow any Eligible Designated Beneficiaries to ‘stretch’ distributions over your life expectancy instead of sticking with the 10-year rule that normally applies.
Example: In 2024, Emily will be 57 years old and married to Harris, who will be 67. They have two children, Malcolm (31) and Sydney (29). Emily has an IRA valued at $1 million. Unfortunately, Emily dies of illness on January 2, 2024. Harris’s options are as follows:
Option 1: Transfer $1 million to your IRA. Harris can roll over Emily’s IRA as her IRA and will be subject to IRA rules. She will have required minimum distributions when she turns 73 (SECURE 2.0 changes the RMD age to 73 in 2023) or 2028. The IRA will grow tax-deferred. When she dies, if she leaves her IRA to her children, they will be subject to the 10-year rule: the funds must be distributed and taxed within 10 years of the IRA owner’s death.
Option 2A: Inherited IRA: Life expectancy. Here, Harris would create an inherited IRA and be able to receive distributions. he would use the IRS Individual Life Tableand you could start taking RMDs after:
· Probably when Emily would have turned 75 (SECURE increases RMD’s age to 75 after 2033); either
12/31/2025
Under the individual life table, Harris would use his life expectancy for the year 2025 (the year after Emily’s death). Harris would have to take RMD at least before 12/31/2042, the year Emily would have turned 75 (this seems to be the rule). He could take them earlier. When Harris dies, if he leaves the IRA to the children, they will have to withdraw the funds under the 10-year rule. This option would be beneficial if Harris wanted a longer compounding period.
Option 2B: Inherited IRA – 10 years. Under this option, Harris would create an inherited IRA and withdraw the funds within 10 years. This option would allow some flexibility in distributions, such as leaving the funds until a later date when he would be in a lower tax bracket.
Option 3: New rule. Under the new rule, Harris could choose to be treated as Emily for IRA purposes. She then could use the most advantageous uniform lifespan table to calculate the life expectancy of RMD. This is quite similar to Option 2 above, in which Harris could defer the RMDs on Emily’s IRA until she would have had to take them (apparently at age 75), and with one important addition: if Harris dies before RMDS begin (12/31/2042, children would be treated as primary account beneficiaries and could stretch distributions over their lifetimes.
The new rule allows for the use of a better life expectancy table (in this case, 24.6 versus 20.4) and allows children to be treated as primary beneficiaries.
While regulations will be needed to further flesh out the details of this new option (such as RMD age), at first glance it would appear that its primary use case will be for surviving spouses inheriting retirement accounts from a younger spouse. By choosing to treat themselves as the deceased, they will be able to delay RMDs longer, and once they start, they will be smaller than if the spouse had made a spousal transfer or was still a beneficiary of the account. It’s a bit morbid to do the exercise, but apparently two things are inevitable: death and taxes, and this new rule may help a little with one of them. As always, I will try to answer any questions, llabrecque@sequoia-financial.com.
