By Vincent Liberti, Jr.

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Qualified Investments: Investment accounts in which one invests pre-income tax dollars. They meet the 1974 Employee Retirement Income Security Act (ERISA) requirements and are funds like 401(k), 403(b), profit-sharing, and Keogh (HR-10) plans, IRAs, and certain annuities.

The new Secure Act (the “Act”) made rules for managing these accounts even more complicated. Whether you are the account owner, beneficiary, or a fiduciary, it is crucial to know when and how much to withdraw from these retirement accounts.

Required minimum distributions (RMDs) must be withdrawn at certain ages from these accounts according to the Internal Revenue Code (the “Code”). This affects the account owner, beneficiaries, and even the fiduciary upon the owner’s death. If you are a fiduciary, usually a personal representative, executor, or administrator as appointed by a probate court, or even a trustee, do not delay when dealing with these accounts. The IRS may impose an excise tax for failure to timely withdraw RMDs.

RMD withdrawals commencement rules for fund owner:

Starting in 2033, RMDs commence at age 75.

Income taxes are paid upon such withdrawals and there is no step-up in cost basis when an account owner dies. Beneficiaries pay the income tax on withdrawals. Starting in 2024, it is no longer required to withdraw RMDs from employer retirement Roth accounts. The rules for the account owner and their beneficiary are complicated and the new rules may affect estate planning objectives, too.

RMDs are determined according to government tables based upon the owner’s or beneficiary’s life expectancy, or by set terms. Payout terms for a beneficiary are impacted by:

A spouse (or disabled or chronically ill child) who inherits a retirement account is considered an eligible designated beneficiary and subject to different withdrawal rules from a designated beneficiary or a non-designated beneficiary. If the owner dies before receiving RMDs, the spouse inheriting the retirement account may use the IRS life expectancy tables to ascertain RMDs pursuant to pre-Act rules. The payout is recalculated annually. But, if the owner dies after commencing RMDs, the life expectancy will be the longer of the owner’s or spouse’s life expectancy, according to such tables. However, proposed Regulations may mandate a 10-year withdrawal term if:

• The retirement account mandates it (the default rule is the life-expectancy withdrawal rule);
• The owner directs that the 10-year rule applies if the owner dies before RMDs commence; and
• If the owner dies before commencing RMDs, the eligible designated beneficiary elects the 10-year rule.

There is no way to elect the 10-year rule if the owner died after their RMDs commence. In addition, the pre-Act rules remain if a spouse chooses to roll over the deceased spouse’s retirement account to the surviving spouse’s retirement account. Such election must be made no later than 60 days from when the surviving spouse receives the first RMD distribution from the inherited account. For all other beneficiaries, the owner’s date of death determines the payout term.

Currently, an able child, considered an eligible beneficiary, is subject to a 10-year withdrawal term. All other beneficiaries are considered non-designated beneficiaries and their payout is determined according to when the owner died. For a disabled or chronically ill child (typically determined by the Department of Social Services) or a minor child, the Code tolls or delays the payout term until the child is no longer disabled/ill or a minor. The Act establishes majority age regardless of state law to begin at age 21 years. When the child reaches 21 or is no longer chronically ill, the 10-year rule begins. If the beneficiary of the retirement account is a Special/Supplemental Needs trust for a disabled or chronically ill child, the payout term is the life expectancy rule. Best advice for managing these accounts: seek professional assistance!

The main negative aspect of the new Act for estate planning purposes is that an owner’s able child may no longer extend or “stretch” RMD payments over the child’s lifetime. Prior estate plans involved holding retirement accounts in trust for children to extend the withdrawal term, which in turn lowers withdrawals and the income taxes on such withdrawals. At a certain age, annually, or at different ages, the trust could specify when the child receives certain percentages of the retirement account. Now, a child must withdraw such accounts by the 10^th year after the owner’s death (or after the beneficiary is no longer a minor or chronically ill). The withdrawals no longer need be equal during each year of this term but, all withdrawals must be distributed by the end of the 10-year term. It is essential to properly draft the trust and beneficiary forms so there is a quantifiable portion or share held only for an individual. Simply designating the owner’s trust is not sufficient. If you have a trust drafted prior to the year 2020, have it reviewed by an estate planning attorney!

There are complicated rule nuances, not just when an owner dies. Rules may be slightly different for each type of qualified retirement account. In addition, for the case of an owner dying after RMDs, the RMDs must be “at least as frequent” as the owner’s RMDs payout term, warranting further analysis.

Guidelines for a fiduciary to follow regarding a retirement account:

• Contact the plan administrator or a financial planner as soon as you know you may be appointed a fiduciary
• Determine if the owner died before or after their determined RMD age for making withdrawals
• Determine the type of beneficiary
• Review the owner’s trust and beneficiary designations to navigate proper treatment
• Review the plan for a mandated payout term or determine if the owner mandated a 10-year withdrawal term and if the spouse wishes to elect the 10-year payout rule
• Determine if there is a disabled, chronically ill, or a minor child
• If the beneficiary is not an eligible or designated beneficiary, the following withdrawal rules apply:
  • If the owner died before their RMD date, the withdrawal term is 5 years
  • If the owner died on or after their RMD date, the non-designated beneficiary receives RMD withdrawals according to what the deceased owner would have received
• If the beneficiary is a designated beneficiary who is not a spouse, disabled, or chronically ill child, the 10-year rule applies regardless of whether the owner died before or after their RMDs commenced. However, the “at least as frequent” rule applies, therefore, the beneficiary must take withdrawals annually with a final payout in year 10. If this end date is missed, the IRS imposes an excise tax
• Seek professional advice from the owner’s plan administrator, a financial planner, an accountant, or an estate planning attorney as soon as possible

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