New (and Old) Required Minimum Distribution Rules

Required Beginning Date

As a top-rated estate planning attorney serving Chester County and beyond, Slutsky Elder Law remains dedicated to our clients, offering them not only trusted legal representation, but information, news, and educational resources as well. Now, we examine the newest information regarding Required Minimum Distribution Rules for retirement accounts, such as IRAs, 401(k)s, 457 Plans and more.

 

The “required beginning date” (RBD) is the date on which the owner of an IRA (or employee of a defined contribution plan) must begin taking required distributions. For IRAs (and many — but not all — defined contribution plans), the RBD has been April 1 of the year following the year in which the owner attains age 70-1/2. This has been changed by the SECURE Act, and for IRA owners who had not reached age 70-1/2 before 2020, the RBD is now April 1 of the year following the year in which the owner attains age 72. So, IRA owners who reached age 70-1/2 in 2019 will have to begin taking required distributions no later than April 1 of 2020, but owners who reach age 70-1/2 in 2020 will not need to begin taking required distributions until the year after they reach age 72, which will be April 1, 2022, at the earliest.

Distribution Period

The required minimum distribution for a year is the value of the account at the beginning of the year divided by the “distribution period.” The distribution period is generally based on life expectancy, but it is necessary to know the age (or ages) for which the life expectancy is being calculated, and for what year, and whether the life expectancy is recalculated each year or reduced by one each year.

Designated Beneficiary

A “designated beneficiary” (DB) is an individual designated as a beneficiary by the IRA owner or plan employee, or by the terms of the IRA or plan. Because the DB must be an individual, it is possible that a beneficiary designated by the IRA owner is not a “designated beneficiary” within the meaning of the statute and regulations. So — for example — the decedent’s estate, a trust, and a charitable organization can all be beneficiaries but none of them will be a “designated beneficiary.” Although a trust may not be DB, it is possible for the beneficiaries of the trust to be considered the DBs.

Eligible Designated Beneficiary

The SECURE Act has introduced a new concept, which is the “Eligible Designated Beneficiary” (EBD).

An EBD is defined as:

 

•The surviving spouse
•A minor child of the owner (but only during minority, the age for which is not specified
•An individual who is disabled (unable to engage in gainful employment under federal law)
•An individual who is chronically ill within (needs help with at least 2 activities of daily living or substantial supervision); and
•Any other individual who is not more than 10 years younger than the owner.

Distributions During Lifetime

Other than the change in the required beginning date, the calculations of required minimum distributions during the owner’s lifetime have not changed.

 

•If the owner’s spouse is the designated beneficiary and the spouse is more than ten years younger than the owner, the distribution period for each year is the joint and survivor life expectancy for the owner and the spouse based on their ages at the end of the year.

 

•In all other cases, the required minimum distribution for each year is based on the distribution period in the Uniform Lifetime Table for the owner’s age at the end of the year. (The distribution periods in the Uniform Lifetime Table are the joint and survivor life expectancies of the account owner and a beneficiary ten years younger.)

Distributions Following Death

The more significant changes made by the SECURE Act are in distributions after the death of the account owner. If the owner dies after the required beginning date, then the distribution for the year in which the owner has died is calculated in the same way as distributions during the owner’s lifetime. It may be payable to a named beneficiary instead of the owner or the owner’s estate, but it is calculated in the same way as lifetime distributions and is payable by the end of the year. The first distribution calculated according to the rules below is payable by the end of the year following the year in which the owner dies.

No Designated Beneficiary

If there is no designated beneficiary, which will be the case when the beneficiary is the owner’s estate, a charitable organization, or a trust which is not a designated beneficiary, then one of two (or perhaps three) different rules apply:

 

•If the owner died before the required beginning date and there is no designated beneficiary, then the entire account must be distributed within five years. This means that the entire account must be distributed before the end of the year in which the fifth anniversary of the death. Although the regulations do not expressly say so, it appears that it is not necessary to make any distributions before the end of that fifth year.

 

•If the owner died on or after the required beginning date and died before 2020, then the balance of the account is distributed over the owner’s remaining life expectancy. The life expectancy of the owner is calculated as of the year of death, and then reduced by one for each year after that.

 

•If the owner died on or after the required beginning date and died after 2019, the result is less clear. Despite the oddness of the result, it seems reasonable to assume that the account can be distributed over the remaining life expectancy of the IRA owner described above, until there is contrary guidance from the Internal Revenue Service.

Spouse as Designated Beneficiary

Because a surviving spouse is an “eligible designated beneficiary,” the changes made by the SECURE Act will have relatively little effect on distributions to spouses as designated beneficiaries.

For deaths of account owners before the RBD, the account must be distributed based on the life expectancy of the surviving spouse, which is recalculated each year. However, the distributions do not need to begin until the end of the year in which the account owner would have attained age 72.

For deaths of account owners on or after the RBD, the account must be distributed based on either the life expectancy of the surviving spouse or the remaining life expectancy of the account owner, whichever is longer. These required minimum distribution rules are all alternatives to the surviving spouse rolling over the entire value of the account into the spouse’s own IRA.

Other Eligible Designated Beneficiaries

The rules for distributions to an eligible designated beneficiary (EDB) who are not the surviving spouse, but are minor children, disabled or chronically ill, or another individual who is not more than 10 years younger than the account owner, are similar to the rules for distributions to the surviving spouse, except that the distributions must begin the year after death and the beneficiary’s life expectancy is not recalculated each year.

 

So, for deaths of account owners before the RBD, the account must be distributed based on the remaining life expectancy of the beneficiary. The remaining life expectancy of the beneficiary is calculated as of the year after the owner’s death and is reduced by one in each year after that.

 

For deaths of account owners on or after the RBD, the account must be distributed based on either the remaining life expectancy of the beneficiary, or the remaining life expectancy of the account owner, whichever is longer. The remaining life expectancy of the beneficiary is calculated as described above under Treas. The remaining life expectancy of the account owner is calculated as of the year of the owner’s death and reduced by one in each year after that. However, there is a special rule for distributions to minor children, which is that the exemption from the 10 year distribution rule no longer applies after the child reaches majority. So, once a minor child reaches majority, the distribution of the balance of the account must be made within 10 years.

 

It is not yet clear whether annual distributions based on life expectancy must continue to be made within that 10 year period or whether the entire balance can be distributed at the end of the 10 year period, as is allowed for accounts that must be distributed within 5 years. It is also not clear what age should apply for determining minority or majority. Under the laws of Pennsylvania (and most other states) a person is an adult at age 18 and can own property, sue and be sued, etc. However, the Pennsylvania Uniform Transfers to Minors Act (and the UTMA enacted in most other states) defines a “minor” as an individual under the age of 21.

Other Designated Beneficiaries

What is probably the biggest change made by the SECURE Act is the treatment of distributions to designated beneficiaries who are not “eligible designated beneficiaries,” and in most cases that will be the adult children of the account owner. Before the enactment of the SECURE Act, the rules for required minimum distributions were the same for all designated beneficiaries other than the surviving spouse, so for deaths before 2020, distributions for designated beneficiaries other than eligible designated beneficiaries are the same as distributions for eligible designated beneficiaries, as described above. Under new rules, for deaths after 2019, accounts with a designated beneficiary that is not an eligible designated beneficiary must be distributed within 10 years and, unlike the 5 year rule for accounts without a designated beneficiary, this new 10 year rule applies to deaths both before and after the required beginning date.

 

It is not yet clear if annual distributions must be made during that 10 year period, whether based on life expectancy or amortized for the 10 year period, or if the entire balance can be distributed at the end of the 10 year period, as is allowed for accounts that must be distributed within 5 years.. The ability to defer any distributions for 10 years, while accumulating tax-deferred income, might have a benefit that equals or even exceeds the past benefit of stretching distributions out over the beneficiary’s life expectancy.

Trusts as Beneficiaries

There are certain requirements in the code that allow the beneficiaries of a trust to be treated as the designated beneficiaries for purposes of required minimum distributions, and those requirements are not difficult to meet (and will not be discussed). What is more difficult to determine is which beneficiaries of the trust are considered in determining whether the beneficiaries of the trust are designated beneficiaries. Before the SECURE Act, there were two types of trusts that could avoid the rule that trusts were not individuals and so could not be designated beneficiaries: trusts that were usually described as either “conduit trusts” or “accumulation trusts.” The SECURE Act adds a third kind of trust: “applicable multi-beneficiary trust.”

 

The SECURE Act gives a little and takes away a little more. But to properly plan for your future and the future of your loved ones it is important to understand what the law does to your retirement plans. For more information on Required Minimum Distribution rules, or for help with estate planning in Montgomery County and the surrounding areas, contact Slutsky Elder Law today.