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A Sneak Preview of Secure Act Regulations


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IRS Publication 590-B, “Distributions from Individual Pension Arrangements,” explains the minimum distribution rules to IRA owners and beneficiaries. The new edition (which will be used “in preparation for the return for 2020”) contains tempting reviews of what we can expect when the US Treasury Department finally passes regulations implementing amendments to the Safe Act in the minimum distribution rules.

Based on publication 590-B, finding the necessary minimum distributions for a beneficiary requires little work, especially if the testator had multiple retirement plans. It remains to be seen whether the various potential combinations of choice and payout period have significant implications for estate planning.

The Insurance Act recognizes three categories of beneficiaries for the purpose of determining the RMD from the testator’s pension plan:

  • Unspecified User or Non-DB: A natural person such as the testator’s estate or any trust that cannot be qualified as “transparent trust” under the IRS minimum distribution trust regulations.
  • Designated Beneficiary: A human beneficiary who does not fit into any of the categories of “Qualified Designated Beneficiary”. I call this person “usually a specific user” or PODB.
  • Eligible Designated Beneficiary, or EDB: These are the five categories of nominated beneficiaries that still qualify for a version of the “life expectancy payment” (annual distributions over the beneficiary’s life expectancy) that was previously (before Secure) available to all designated beneficiaries: the testator surviving spouse; the minor child of the testator; a person with a disability; chronically ill person; and any person not older than ten years younger than ten years (and not included in any of the other categories).

The Safety Act tells us that EDBs pay for life expectancy; PODBs receive a “10-year rule” payment; and persons without DB receive either a five-year rule payment or a “testator’s life expectancy” payment, depending on whether the testator died before or after his required start date (or RBD, the date on which he should have started taking RMD during his lifetime). The life expectancy of a testator, which refers to persons outside the DB if the testator died after RBD, means what his or her life expectancy would have been based on his or her age after death if he or she had not died. Practitioners have adopted the colorful term “life expectancy” to describe this payout period.

Of course, Publication 590-B must follow the required insurance scheme, but the IRS added some reversals to it, as it did with the minimum pre-insurance distribution rules. The Treasury does this to eliminate potential situations where, if the Code’s minimum distribution rules are fully followed, an unspecified user could end up with a better “job” than a particular user, or an ordinary old named user could be better than a supposedly more favored acceptable particular users. Here’s how the new RMD rules will work with these IRS patches, if 590-B is an accurate review. (As a reminder, the IRS publication is not an “authority” and cannot be cited or relied upon to support the tax position.)

The participant dies before the required start date

An unspecified beneficiary must withdraw benefits under a five-year rule. All benefits must be distributed from the inherited plan by the end of the year containing the fifth anniversary of the date of death (or the sixth anniversary in the event of death in the period 2015-19).

The designated beneficiary who normally applies must withdraw his benefits under the 10-year rule: All benefits must be distributed from the inherited plan by the end of the year containing the tenth anniversary of the date of death. Since 10 years is obviously longer than five years, here we don’t worry about whether non-DB might somehow get a better offer than PODB.

Finally, the eligible designated beneficiary is entitled to a life expectancy payment (although only until adulthood, in the case of a minor child of the decedent). But here the IRS provides an additional benefit to EDB, according to publication 590-B: EDB may choose to use the 10-year rule instead of paying for life expectancy. This is in line with pre-insurance regulations that allowed a particular beneficiary to choose a five-year payment instead of a life expectancy payment, although this option was rarely used.

Why would EDB want to use the ten-year rule instead of paying annually over its lifetime? It would probably be interesting if the life expectancy of EDB was less than 10 years. It can also be attractive in the case of an inherited Roth IRA where the life expectancy payment with its annual RMDs could be less profitable than the end-of-10-year payout even if the life expectancy period is slightly longer.

The participant dies on or after the desired start date

The unspecified beneficiary in this situation must withdraw using the payment of the spirit for life expectancy – the annual distribution of what would have been the remaining life expectancy of the testator had he not died. The life expectancy of a ghost could be as high as 16 years if the deceased died at the age of 73, but it is four years or less if the death occurs after the age of 94.

How about a qualified specific user? The EDB of course has the right to retire in annual distributions during his or her lifetime, but Publication 590-B provides an additional advantage: If the EDB is older than the testator, the EDB uses the life expectancy of the spirit. In other words, the payout period for EDB is longer than the life expectancy of the decedent or the life expectancy of the beneficiary. This is a continuation of the “longer rule” that applied to all specific users before insurance. But according to Publication 590-B, the EDB cannot choose here to use the ten-year rule. EDB can choose to use the ten-year rule only if the testator died before the required start date!

Finally, we come to a purely old particular user. Publication 590-B is short and sweet here: PODB must use a ten-year rule. The PODB cannot choose to take advantage of the lifespan of the spirit.

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

Joe’s example

Here’s how all of this could play out if your client “Joe” dies at age 75, with a traditional IRA, a Roth IRA, and a 401 (k) plan in his Acme Widget workplace. Joe is not a 5% owner of Acme and did not retire, so his death is before the required start date for Plan 401 (k), but after the RBD for his IRA (his RBD for the traditional IRA occurred on April 1). a year after he turned 72 or 70 1/2, depending on what was applied) and before he got an RBD for a Roth IRA (because Roth IRAs have no RMD during their lifetime, so no RBD). With the Roth IRA, death is always “before RBD”.

Consider three scenarios: Joe leaves all plans to his non-disabled adult son Harold, 45; or his older sister Randi, 79; or on his property.

Son Harold is usually an old user. For him, all three plans could be paid for over a period of ten years. There is no choice, no rule “no more”; just withdraw all benefits from all three plans by the end of the year containing the 10th anniversary of Joe’s death at the latest. If Plan 401 (k) does not allow this deferred payment, Harold may transfer that plan by direct transfer to the inherited IRA.

Sister Randa is a qualified beneficiary (in the “no more than 10 years younger” category). For a traditional IRA, since Joe has gone through his RBD, the payout period is longer than Joe’s life expectancy or his own life expectancy. Since Joe was younger, his life expectancy (spirit lifespan) is obviously longer than hers, so Joe’s lifespan would be her pay period, with annual distributions. Elections are not included and she is not allowed to choose the ten-year rule. The “longer than” rule will apply only to life expectancy payments and not to the 10-year rule, according to Publication 590-B.

For the Roth IRA, since Joe’s death was before RBD, Randa gets a different treatment – she can choose to use either the 10-year rule or her life expectancy. At age 79, her life expectancy is 11.9 years. For 401 (k), the death was before RBD, so she also has that choice for this plan (as well as the ability to transfer the plan to an inherited IRA). The choice to take annual distributions over its 11-year lifespan must be weighed with the possibility of accumulating the entire plan by the end of the ten-year period. He doesn’t have to make the same choice for both plans.

For the most precise planning when choosing between the 10-year rule and life expectancy payouts, if Randa thinks she is likely to die before the end of life expectancy, she may weigh the fact that life expectancy would turn to the 10-year rule after her death, so the actual payout period was, its remaining life plus 10 years. That angle could be important if she doesn’t expect to live long and wants to maximize the delay in favor of her heirs. But if she chooses a life expectancy payment and then actually lives to her full life, there will be nothing left to “reverse” to a 10-year payment after her death.

Finally, if Joe had simply given up trying to choose the best beneficiary and left all his plans to his property, which is an undefined beneficiary, the traditional IRA would have been paid according to the ghost life expectancy rule and Roth IRAs and the 401 (k) plan would subject to a five-year rule. But if the only option to pay the 401 (k) plan is a one-time distribution (which is common for such plans), the executor would stick to it, as it would not be possible to transfer the inherited plan 401 (k) to the inherited IRA. This direct switching option is only available to certain users.

Good luck explaining all this to Joe’s family.

Natalie Choate is a lawyer from Wellesley, Massachusetts, who concentrates on planning a retirement estate. Choate best-selling book edition for 2019, Life and death planning for pension benefits, is available through its website, www.ataxplan.com, where you can also see her speech schedule and send questions for this column. The views expressed in this article do not necessarily reflect the views of Morningstar.

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