The SECURE Act's Eligible Designated Beneficiary Designations
The SECURE Act's Eligible Designated Beneficiary Designations
Inheriting an IRA can be a good thing, but the type of inheritance carries complications due to the regulations that you — as the recipient — must adhere to in terms of required minimum distributions. You also need to take the related taxes and penalties into consideration.
These rules have become even more complex following the 2019 SECURE Act and the 2022 SECURE Act 2.0. For instance, the age at which IRA recipients have to start taking RMDs was altered between 2019 and 2022.
This age increased from 72 years old to 73 years old in 2023, and, in 2033, the age will increase once more, reaching a peak of 75 years old. Additionally, the SECURE Act implemented the eligible designated beneficiary designation.
This detail identifies five categories of beneficiaries, and certain trusts might also be eligible for consideration as designated beneficiaries.
The 'big five'
These are the five categories of beneficiaries under the SECURE Act and SECURE ACT 2.0:
Surviving spouses
Beneficiaries younger than 21 years old
Disabled individuals
Chronically ill beneficiaries
Nonspousal beneficiaries no more than 10 years younger than the deceased
Surviving spouses
A surviving spouse has two main options when planning to take their RMDs. They can either wait to take any RMDs until 1) the year after the original account holder passes away or 2) the year the original holder was required to start their RMDs.
As of 2024, surviving spouses can also be treated as the original IRA owner. This approach allows RMDs to be based on the younger spouse's life expectancy, with distributions delayed until they reach their own required start date.
For spouses who are more than 10 years younger or more than 10 years older than the original IRA owner, there are special rules that change how RMDs are calculated. As an example, if the surviving spouse under the age of 59 ½ years old needs access to the IRA funds, they can treat it as a beneficiary IRA.
This allows them to take distributions at any age without being affected by the 10% early withdrawal penalty that is usually applied to these situations.
Beneficiaries younger than 21 years old
Children who have yet to turn 21 years old can adhere to rules that allow them to withdraw from the account based on their own life expectancy. However, with few exceptions, the 10-year rule will apply once the child turns 21. Under certain circumstances, the age of 26 is applicable instead.
Disabled individuals
A person is considered disabled if they meet the criteria defined in Section 72(m)(7) of the Internal Revenue Code. Beneficiaries who legally qualify as being disabled are subject to specific distribution rules.
Chronically ill beneficiaries
A person is considered chronically ill if their condition meets the definition in IRC Section 7702B(c)(2). Similar to disabled beneficiaries, those who qualify as chronically ill are subject to specific distribution rules.
Nonspousal beneficiaries no more than 10 years younger than the deceased
Beneficiaries in this group must start taking their RMDs by December 31 of the year after the original account holder's death. If the deceased party had already started taking RMDs prior to his or her death, the new amount is based on the age of the deceased or the beneficiary — whomever is younger.
If they hadn't started yet, the amount is calculated using the beneficiary's age. As with most other tax and estate planning processes, the choices that IRA beneficiaries make have consequences, but not all of them are negative.
When you operate within the confines of the law, the SECURE Act can guide you in the right direction based on the specifics of your situation. To keep your best interests in mind, consult with an experienced professional who can help you understand the full scope of any decisions you plan to make.
Enjoy this article? Sign up for our newsletter here: The Brandenburg Estate Planning Law Firm Newsletter