The SECURE Act of 2020: How Does it Affect Required Minimum Distributions?

The Setting Every Community Up For Retirement Enhancement Act, also known as the SECURE Act (the “Act”), was signed into law on December 20, 2019 as part of a larger government spending package and became effective January 1, 2020. The focus here is the impact that the Act has on Required Minimum Distributions (“RMD”) for retirement account owners and their Designated Beneficiaries.

What are Required Minimum Distributions?

An individual’s RMD is the minimum amount that he or she must withdraw from his or her account each year once that individual reaches a certain age designated by Federal law.

What Hasn’t Changed?

• Definition of Designated Beneficiary. According to the Treasury Regulations, a Designated Beneficiary is an individual who is an individual that may be designated as beneficiary under the plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the employee (or the employee’s surviving spouse) specifying the beneficiary.
• A See-Through Trust Can Still Qualify as a Designated Beneficiary. See-Through Trusts continue to qualify for Designated Beneficiary status, although the specific qualifications for such a Trust is beyond the scope of this article.
• Rules relating to RMD for Beneficiary who is not a Designated Beneficiary. A non-Designated Beneficiary is a beneficiary that is either the participant’s estate, a charity, or a trust that does not qualify as a see-through trust. Non-designated beneficiaries are still subject to the 5-year withdrawal rule for benefits of a participant that died prior to his Required Beginning Date, which is the date in which that individual must begin taking their Required Minimum Distribution. This means that the account must be fully distributed by December 31st of the calendar year 5 years after the participant’s death. If, however, the participant died after his or her Required Beginning date, then the RMD is based on the participant’s life expectancy starting the year of the participant’s death, which is recalculated each subsequent year.

What’s Changed?

• Required Beginning Date for RMD. Prior to the Act, an individual’s Required Beginning Date was set at 70 ½ years. Thus, the old rules relating to Required Minimum Distributions applies to participants who passed prior to December 31, 2020. Beneficiaries of retirement plans established by participant’s who passed on or after January 1, 2020 must now follow the new RMD Rules, which designates the Required Beginning Date at 72 years.
• Life Expectancy “Stretch” RMD Payments No Longer Available, Except Under Certain Circumstances. Under the old rules, a Designated Beneficiary was required to make RMD withdrawals from inherited accounts over is or her life expectancy. Now, all retirement plan amounts must be distributed to Designated Beneficiaries by December 31 of the year that contains the 10th anniversary of the date of death of the participant.
  • Eligible Designated Beneficiaries. Notwithstanding the new 10-year rule for Designated Beneficiaries, certain “Eligible Designated Beneficiaries” may still take advantage of the old life expectancy payout rules. These Eligible Beneficiaries include the following:
    • Surviving Spouse. The surviving spouse may continue to use the life expectancy payout. However, upon his or her death, the exception ceases to apply and the 10-year mandatory withdrawal rules apply.
    • Minor Children of Participant. Minor children of the participant may continue to use the life expectancy payout until they reach the age of majority. Once the child reaches the age of majority, the 10-year mandatory withdrawal rules apply.
    • Disabled Beneficiary. A disabled beneficiary, as defined by IRC § 72(m)(7) may utilize the lifetime expectancy payout. Upon the disabled beneficiary’s death, the 10-year payout rule applies.
    • Chronically Ill Individual. Again, a Chronically Ill Individual, as defined in IRC § 7702B(c)(2), may continue to utilize the lifetime expectancy payout, and upon his or her death the 10-year payout rule applies.
    • Beneficiaries Less Than 10 Years Younger Than the Participant. If a Designated Beneficiary is not more than 10 years younger than the participant, than he or she may use the life expectancy payout. Upon his or her death, the 10-year payout rule applies.

Contact Jorgensen, Brownell & Pepin, P.C. today to speak with an experienced estate planning attorney to discuss your options in light of the SECURE ACT.