The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) made significant changes to the required minimum distributions rules related to certain tax-deferred retirement accounts after a plan participant’s death. Most significantly, for participants who die after December 31, 2019, the participant’s full retirement account must generally be distributed within 10 years after the participant’s death. The “stretch pay-out” based on the beneficiary’s life expectancy is no longer available. However, this is a general rule, as there are certain “eligible designated beneficiaries” who can still benefit from a stretch pay-out over the beneficiary’s life expectancy. Non-designated beneficiaries (for example, an estate) must still take full distribution of the account within five years of the participant’s death.
While most advisors previously interpreted the SECURE Act’s 10-year pay-out requirement to mean that distributions could be taken at any time during that 10-year period, the IRS issued Proposed Regulations on February 24, 2022 that state otherwise.
Based on the Proposed Regulations, the structure of the distributions will depend on whether the plan participant dies before or after his or her required beginning date (RBD) for those who fall under the 10-year payout requirement. If the participant dies before his or her RBD, then a designated beneficiary must receive a full distribution under the 10-year rule, but the distributions can occur all in year one, all in year 10, or any combination in between. If the participant dies after his or her RBD, a designated beneficiary must receive a full distribution under the 10-year rule but must also take annual distributions under the life expectancy rule until the account is fully distributed within the 10-year period.
The Proposed Regulations have added another level of complexity to the rules surrounding distributions from retirement accounts after a participant’s death, and it is important for beneficiaries to speak with their financial and tax advisors to determine how the rules apply to them. Note that comments to the Proposed Regulations are not yet final, so there may still be more changes to come.