Who says that the glass is half empty at the IRS? While it is often said that the IRS views taxpayers as wealthier than we feel, the IRS now anticipates that taxpayers will enjoy a longer life expectancy than is supported by recent data.
According to the CDC, and as reported by CNN, the life expectancy at birth dropped by 1.8 years between 2019 and 2020, from 78.8 years in 2019 to 77 years in 2020. This was the single largest drop in life expectancy, year-to-year, since World War II. Effective as of January 1 of this year, we have new life expectancy tables for use in determining the minimum amount that must be withdrawn annually from all retirement accounts (IRAs, Simple IRAs, 401ks, etc.). These tables are applicable not just for determining the amounts that must be withdrawn once the current account owner reaches the required beginning date of age 72, but also the required minimum amounts that must be withdrawn annually following the original account owner’s death.
In this month’s update, I summarize the basic rules applicable to the “required minimum distributions” (“RMDs”) applicable to retirement accounts following death. In next month’s update, I will summarize the “tax efficiency v. trust control” tradeoff in making decisions about whether retirement account assets should be owned by a trust following death.
The Secure Act
For deaths occurring before January 1, 2020, it was possible for the named beneficiaries of a deceased account owner’s retirement account assets to “stretch” the period of their withdrawals over their entire lifetime. Now, by reason of the “Setting Every Community Up for Retirement Enhancement” Act (“SECURE” Act) enacted in December of 2019, the rules differ depending upon the identity of a named beneficiary. If a named beneficiary meets the definition of an “Eligible Beneficiary,” the “stretch” rules would continue to apply to that beneficiary. If, however, a named beneficiary does not meet the definition of an Eligible Beneficiary, the remaining account assets must be withdrawn by the 10th anniversary of the death of the original owner.
Withdrawal Rules According to the Identity of the Beneficiary
The RMD rules applicable to a deceased owner’s remaining retirement account assets will depend upon the identity of each named beneficiary, as follows:
- Surviving Spouse: If the deceased spouse named his or her surviving spouse, the surviving spouse may “roll over” the account and only begin taking distributions once he or she reaches age 72. Once the surviving spouse reaches age 72 and begins taking RMDs, the Uniform Life Expectancy Table must be used.*
- Other “Eligible Beneficiaries:” If the named beneficiary is not a surviving spouse but meets one of the following definitions of an “Eligible Beneficiary,” the named “Eligible Beneficiary” can use his or her life expectancy in calculating RMDs. An Eligible Beneficiary is anyone who is:
- within 10 years of age of the deceased account owner;
- a minor child of the deceased account owner; or
- defined by IRS regulations to be either “chronically ill” or “disabled.”
If a beneficiary meets the definition of an “Eligible Beneficiary,” then she or he uses the “Single Life Expectancy Table.” For example, if a 30-year-old disabled child is named as a beneficiary of an IRA, the life expectancy of that child under the “new” life expectancy table is now 55.3 years, up from 53.3 years under the “old” table.
- All Other “Non-Eligible” Individual Beneficiaries: In most families, there will be no possible beneficiaries who meet the definition of an “eligible beneficiary” to receive remaining retirement account assets following the second death. In those cases, the named beneficiaries must withdraw remaining retirement account assets by December 31st of the calendar year that contains the 10th anniversary of the account owner’s death. Please note that during this 10-year period, withdrawals do not need to be made annually or proportionately. Rather, withdrawals can be made for optimal tax planning purposes so long as all assets are distributed from the inherited IRA by the end of the 10-year period.
- Charitable Beneficiaries: Finally, it is worth noting that no income tax obligations are owed whatsoever by a charitable beneficiary. To the extent that clients have charitable objectives, designating one or more charities as beneficiaries of remaining tax-deferred retirement account assets will lead to the best tax result.
In summary, keep in mind that the new life expectancy tables are a double-edged sword for tax-planning purposes. A longer life expectancy means that a slightly larger amount can be retained inside tax-deferred retirement accounts throughout the rest of the account owner’s lifetime. However, following the account owner’s death, the 10-year payout requirement for most families will have the result of “compressing” the time frame for the payment of the resulting income tax obligations.