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Financial Advice

A Sneak Preview of Secure Act Regulations

Changes to the minimum distribution rules get some added wrinkles from the IRS.

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IRS Publication 590-B, "Distributions from Individual Retirement Arrangements (IRAs)," explains the minimum distribution rules to IRA owners and beneficiaries. The new edition (to be used "in preparing 2020 returns") contains tantalizing previews of what we can expect when the U.S. Treasury Department eventually issues regulations implementing the Secure Act's changes to the minimum distribution rules.

Based on Publication 590-B, figuring out required minimum distributions for a beneficiary will take a bit of work, especially if the decedent had multiple retirement plans. Whether the various potential combinations of elections and payout periods have significant implications for estate planning remains to be seen.

The Secure Act recognizes three classes of beneficiaries for purposes of determining RMDs from a decedent's retirement plan:

  • The nondesignated beneficiary, or non-DB: A nonindividual such as the decedent's estate or any trust that does not qualify as a "see-through trust" under the IRS' minimum distribution trust regulations.
  • The designated beneficiary: A human beneficiary who does not fit into any of the categories of "eligible designated beneficiary." I call this person a "plain-old designated beneficiary," or PODB.
  • The eligible designated beneficiary, or EDB: These are five categories of designated beneficiaries who still qualify for some version of the "life expectancy payout" (annual distributions over the beneficiary's life expectancy) that was formerly (prior to Secure) available for all designated beneficiaries: the decedent's surviving spouse; a minor child of the decedent; a disabled individual; a chronically ill individual; and any individual who is not more than 10 years younger than the decedent (and is not includible in any of the other categories).

The Secure Act tells us that EDBs get a life expectancy payout; PODBs get the "10-year rule" payout; and non-DBs get either the five-year rule payout or the "decedent's life expectancy" payout, depending on whether the decedent died before or after his required beginning date (or RBD, the date on which he was required to start taking RMDs during life). The decedent's life expectancy, which applies to a non-DB if the decedent died after his RBD, means what would have been his life expectancy based on his age at death if he hadn't died. Practitioners have adopted the colorful term "ghost life expectancy" to describe this payout period.

Of course, Publication 590-B must follow Secure's required scheme, but the IRS has added some twists to it, as it did with the pre-Secure minimum distribution rules. The Treasury does this to head off potential situations where, if the Code's minimum distribution rules are followed to the letter, a nondesignated beneficiary could end up with a better "deal" than a designated beneficiary, or a plain-old designated beneficiary could be better off than the supposedly more-favored eligible designated beneficiary. Here is how the new RMD rules will work with these IRS-added patches, if 590-B is an accurate preview. (As a reminder, an IRS Publication is not "authority" and cannot be cited or relied upon to support a tax position.)

The Participant Dies Before His Required Beginning Date

The nondesignated beneficiary must withdraw benefits under the five-year rule. All benefits must be distributed from the inherited plan by the end of the year that contains the fifth anniversary of the date of death (or sixth anniversary in the case of deaths in 2015-19).

The plain-old designated beneficiary must withdraw his or her benefits under the 10-year rule: All benefits must be distributed from the inherited plan by the end of the year that contains the tenth anniversary of the date of death. Since 10 years is obviously longer than five years, there is no worry here about whether the non-DB might somehow get a better deal than the PODB.

Finally, the eligible designated beneficiary is entitled to a life expectancy payout (though only until reaching majority, in the case of a minor child of the decedent). But here the IRS provides an added benefit for the EDB, according to Publication 590-B: The EDB can elect to use the 10-year rule instead of the life expectancy payout. This is consistent with pre-Secure regulations that allowed a designated beneficiary to elect the five-year payout instead of the life expectancy payout, though that option was rarely exercised.

Why would an EDB want to use the 10-year rule instead of taking annual payments over his or her life expectancy? Presumably this would be of interest if the EDB's life expectancy was less than 10 years. It can also be attractive in the case of an inherited Roth IRA where a life expectancy payout, with its annual RMDs, might be less profitable than a pay-all-at-the-end 10-year payout even if the life expectancy period is somewhat longer.

The Participant Dies On or After His Required Beginning Date

The nondesignated beneficiary in this situation must withdraw using the ghost life expectancy payout--annual distributions over what would have been the decedent's remaining life expectancy if he hadn't died. The ghost life expectancy could be as long as 16 years if the decedent died at age 73, but is four years or less if death occurs after age 94.

How about the eligible designated beneficiary? The EDB of course is entitled to withdraw in annual distributions over his or her life expectancy, but Publication 590-B gives an added benefit: If the EDB is older than the decedent, the EDB uses the ghost life expectancy. In other words, the payout period for the EDB is the longer of the decedent's life expectancy or the beneficiary's life expectancy. This is a continuation of the "longer of rule" that applied to all designated beneficiaries before Secure. But according to Publication 590-B, the EDB cannot elect to use the 10-year rule here. An EDB can elect to use the 10-year rule only if the decedent died before his required beginning date!

Finally, we come to the plain-old designated beneficiary. Publication 590-B is short and sweet here: The PODB must use the 10-year rule. The PODB cannot elect to use the ghost life expectancy.

Since the ghost life expectancy would be longer than 10 years if the decedent died between approximately the ages of 73 and 80, does this mean that some non-DBs will be better off than the PODBs of the same decedent? Maybe. To get the answer to that question, hire a math whiz to compare the financial impact of annual RMDs over a ghost life expectancy with a pay-all-at-the-end 10-year rule payout.

Joe Example

Here's how this all might play out if your client "Joe" dies at age 75, with a traditional IRA, a Roth IRA, and a 401(k) plan at his place of employment Acme Widget. Joe is not a 5% owner of Acme and has not retired, so his death is before his required beginning date for the 401(k) plan, but after the RBD for his IRA (his RBD for the traditional IRA happened April 1 of the year after he reached age 72 or 70 1/2, whichever applied ) and before his RBD for the Roth IRA (because Roth IRAs have no RMDs during life therefore no RBD). With a Roth IRA, death is always "before the RBD."

Consider three scenarios: Joe leaves all the plans to his nondisabled adult son Harold, age 45; or to his older sister Randa, age 79; or to his estate.

Son Harold is a plain-old designated beneficiary. For him, all three plans would be payable under the 10-year rule, period. No elections, no "longer of" rule; just withdraw all benefits from all three plans no later than the end of the year that contains the 10th anniversary of Joe's death. If the 401(k) plan does not allow this deferred payout, Harold can transfer the plan via direct rollover to an inherited IRA.

Sister Randa is an eligible designated beneficiary (in the "not more than 10 years younger" category). For the traditional IRA, since Joe was past his RBD, her payout period is the longer of Joe's life expectancy or her own life expectancy. Since Joe was younger, his life expectancy (the ghost life expectancy) is obviously longer than hers, so Joe's life expectancy would be her payout period, with annual distributions required. No elections involved, and she is not allowed to elect the 10-year rule. The "longer of" rule will apply only to life expectancy payouts, not the 10-year rule, according to Publication 590-B.

For the Roth IRA, since Joe's death was before the RBD, Randa gets different treatment--she can elect to use either the 10-year rule or her life expectancy. At age 79 her life expectancy is 11.9 years. For the 401(k) also, death was before the RBD, so she also has that election for this plan (as well as the ability to transfer the plan to an inherited IRA). She must weigh the choice of taking annual distributions over her 11-year life expectancy against having the option to accumulate the entire plan until the end of the 10-year period. She does not have to make the same choice for both plans.

For the most precise planning in choosing between the 10-year rule and the life expectancy payout, if Randa thinks she is likely to die well before the end of her life expectancy, she can weigh in the fact that the life expectancy would flip to a 10-year rule upon her death, so the actual payout period would be, her remaining life span plus 10 years. That angle could be important if she does not expect to live very long and wants to maximize deferral for the benefit of her successor beneficiaries. But if she chooses the life expectancy payout then actually lives to her full life expectancy, there will be nothing left to "flip" to a 10-year payout upon her death.

Finally, if Joe just gave up on trying to choose the best beneficiary and left all his plans to his estate, which is a nondesignated beneficiary, the traditional IRA would be payable under the ghost life expectancy rule and the Roth IRA and 401(k) plan would be subject to the five-year rule. But if the 401(k) plan's only payout option is a lump-sum distribution (which is common for such plans), the executor would be stuck with that because there would be no ability to transfer the inherited 401(k) plan to an inherited IRA. That direct rollover option is available only for designated beneficiaries.

Good luck explaining all this to Joe's family.

Natalie Choate is a lawyer in Wellesley, Massachusetts, who concentrates in estate planning for retirement benefits. The 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article do not necessarily reflect the views of Morningstar.

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