Change for Beneficiaries of Retirement Plans.

• Author: Foss, Mary Kay

The SECURE Act was passed in December 2019 and effective in 2020. Although it did good things, like increasing the RMD age to 72 (now 73) and allowing those over 70.5 to contribute to IRAs, it made a big change for beneficiaries of retirement plans.

Before SECURE, beneficiaries were either designated (meaning they had a life expectancy) or non-designated (meaning they had no life expectancy). Designated beneficiaries claimed the retirement benefits (RMDs) over their life expectancy measured by their age in the year after the death. Non-designated beneficiaries took benefits over the remaining life expectancy of the decedent if that person had passed their Required Beginning Date (RBD) and was taking RMDs--the At Least As Rapidly rule. If the decedent had not reached the RBD before death, the account had to be liquidated within five years.

SECURE divided designated beneficiaries into two classes: eligible designated beneficiaries and those not "eligible."

Eligible designated beneficiaries (EDBs) were in five classes: Surviving spouse, person less than 10 years younger, disabled person, chronically ill person and minor child of the decedent until age 21. Designated beneficiaries that didn't fit into those classes had a 10-year rule that Congress said would work like the five-year rule. So most of us thought they'd have until the end of the year with the 10th anniversary of the death to empty the retirement plan.

In February 2022, the IRS came out with proposed regulations interpreting SECURE and rewriting the existing regulations for retirement plan distributions. Surprisingly, the new rules said that those designated beneficiaries of someone required to take RMDs before death had to take RMDs based on their own life expectancy for nine years and liquidate the fund in the 10th year.

As required, the IRS asked for comments on the proposed regulations and they were deluged with them, especially about the 10-year rule. An immediate concern was that very few designated beneficiaries would have taken an RMD in 2021 and they were facing a 50 percent penalty that they had no way to undo.

Recap

* Non-designated beneficiaries had no changes made by SECURE or the proposed regulations. Surviving spouses and disabled and chronically ill beneficiaries were eligible and RMDs were required just as before SECURE.

* Eligible designated beneficiaries who were older than the decedent taking RMDs could use the decedent's age for RMDs, but they'd end based on the...