The SECURE Act was passed in December 2019 and effective in 2020. Although it did good things, like increasing the RMD age to 72 (now 73) and allowing those over 70.5 to contribute to IRAs, it made a big change for beneficiaries of retirement plans.
Before SECURE, beneficiaries were either designated (meaning they had a life expectancy) or non-designated (meaning they had no life expectancy). Designated beneficiaries claimed the retirement benefits (RMDs) over their life expectancy measured by their age in the year after the death. Non-designated beneficiaries took benefits over the remaining life expectancy of the decedent if that person had passed their Required Beginning Date (RBD) and was taking RMDs—the At Least As Rapidly rule. If the decedent had not reached the RBD before death, the account had to be liquidated within five years.
SECURE divided designated beneficiaries into two classes: eligible designated beneficiaries and those not “eligible.”
Eligible designated beneficiaries (EDBs) were in five classes: Surviving spouse, person less than 10 years younger, disabled person, chronically ill person and minor child of the decedent until age 21. Designated beneficiaries that didn’t fit into those classes had a 10-year rule that Congress said would work like the five-year rule. So, most of us thought they’d have until the end of the year with the 10th anniversary of the death to empty the retirement plan.
In February 2022, the IRS came out with proposed regulations interpreting SECURE and rewriting the existing regulations for retirement plan distributions. Surprisingly, the new rules said that those designated beneficiaries of someone required to take RMDs before death had to take RMDs based on their own life expectancy for nine years and liquidate the fund in the 10th year.
As required, the IRS asked for comments on the proposed regulations and they were deluged
with them, especially about the 10-year rule. An immediate concern was that very few designated beneficiaries would have taken an RMD in 2021 and they were facing a 50 percent penalty that they had no way to undo.
Non-designated beneficiaries had no changes made by SECURE or the proposed regulations. Surviving spouses and disabled and chronically ill beneficiaries were eligible and RMDs were required just as before SECURE.
Eligible designated beneficiaries who were older than the decedent taking RMDs could use the decedent’s age for RMDs, but they’d end based on the beneficiary’s shorter life expectancy.
Minor child beneficiaries had to take RMDs until age 21; they would continue to take RMDs if the decedent was taking them until
age 31, when the account would be liquidated. If the decedent was not taking RMDs, the child beneficiary would have until the end of the 10th year to liquidate the account.
Designated beneficiaries who were not “eligible” must take RMDs if the decedent was taking them and can wait until the 10th year if the decedent was not.
If the account is a Roth IRA, designated beneficiaries have no RMDs; eligible designated beneficiaries follow the same rules as other IRAs and non-designated beneficiaries use the five-year rule.
AICPA and others urged IRS to do something in 2022 to handle the confusion of making surprising rules that would be impossible to fix. In response, IRS issued Notice 2022-53 in October 2022 that waived any 50 percent penalties for those designated beneficiaries who failed to take RMDs for 2021 or 2022 and put off the effective date of final regulations until 2023.
Along came SECURE 2.0 in December 2022 that tinkered with the 50 percent penalty for failure to take RMDs when required. To make it more interesting, IRA custodians and plan administrators have never had a requirement to calculate RMDs for beneficiaries, so they’ve always been more vulnerable to missed RMDs than retirees.
SECURE 2.0 reduced the 50 percent penalty to 25 percent and reduces the 25 percent penalty to 10 percent if the missed RMD is withdrawn timely.
Before SECURE 2.0, the IRS could waive the penalty for a missed RMD if there was a good reason for failure and the missed amount was withdrawn. You could request the waiver on Form 1040 or 1041 as an attachment to Form 5329 where penalties were assessed. The waiver language was not removed by SECURE 2.0, so a waiver is still possible.
Another change by SECURE 2.0 is a statute of limitations on the 50 percent/25 percent/10 percent penalty. Previously the Tax Court indicated that the statute did not run for a penalty assessed on Form 5329 unless the form was filed. Now the statute of limitations for a missed RMD is three years, probably the same as the statute of limitations for the associated Form 1040. That provision was effective upon enactment, but it’s unclear whether past failures are covered by the new law.
Mary Kay Foss CPA is a member of the CalCPA Estate Planning Committee. You can reach her at email@example.com.