Earlier this week, the President signed the “Setting Every Community Up for Retirement Enhancement Act” (the “SECURE Act” or the “Act”), a measure affecting retirement benefits that was passed by the House and Senate last week. The Act notably increases the age for beginning required minimum distributions (“RMD”) to 72 (for those owners who have not attained the age of 70½ by 12/31/2019), eliminates the age restriction on deductible IRA contributions, and allows penalty-free withdrawals for births and adoptions. The Act also makes it easier for employers to offer annuities which could provide employees with a reliable income stream in retirement, a move that has attracted mixed reviews.
Perhaps most notably, the SECURE Act makes significant changes to the rules regarding beneficiaries of retirement accounts after the death of the owner. The Act institutes a new “10-year rule” requiring many beneficiaries to withdraw the entire balance of the account within 10 years (similar to the prior five-year rule). The new 10 year rule applies to all “designated beneficiaries” who are not “eligible beneficiaries.” Individuals treated as eligible beneficiaries include the surviving spouse, persons not more than 10 years younger than the account owner, minor children (until obtaining age of majority), disabled persons, and chronically ill persons. There are no changes to the payout or rollover provisions for a surviving spouse beneficiary.
Beneficiaries not treated as an “eligible beneficiary” fall into two categories: designated beneficiaries and non-designated beneficiaries. If the beneficiary is a designated beneficiary, such as a named individual who does not qualify as an eligible beneficiary, then the account payout must occur within 10 years. The new “10-year rule” is expected operate in the same fashion as the familiar five-year rule in that distributions must be made “within 10 years after the death” of the deceased account owner. This means that there would be no required minimum distributions the account payout must occur within 10 years. Presumably, the beneficiary could decide in which manner to withdraw the funds (10 percent each year, nothing in years one through nine and the entire amount in the tenth year, etc.) as long as the entire amount is withdrawn within 10 years.
A non-designated beneficiary’s payout depends upon the timing of the account owner’s death. If the account owner died before starting RMDs, then the account payout must occur under the familiar five-year rule so that the account payout has completed within five years from the death of the account owner. If the account owner died after starting RMDs, then the remaining account payout is done over the account owner’s remaining life expectancy.