The SECURE Act's Impact on Inherited Retirement Accounts

Navigating inherited retirement accounts has become more complex due to significant regulatory shifts brought by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and subsequent updates in the SECURE 2.0 Act of 2023. Here’s an overview of how these changes impact beneficiaries and what it means for estate planning.

SECURE Act of 2019: Key Changes

The original SECURE Act, enacted in 2019, overhauled the distribution rules for inherited retirement accounts. Previously, designated beneficiaries could often “stretch” required minimum distributions (RMDs) based on their life expectancy, allowing tax-deferred growth over a longer period. However, the SECURE Act replaced this with a 10-year rule for most non-spouse beneficiaries:

1. 10-Year Distribution Rule: Non-spouse beneficiaries now generally must withdraw all assets from an inherited IRA or retirement plan within ten years of the account holder’s death, rather than over their lifetimes. This change speeds up the timeline and may accelerate taxable income for beneficiaries​​.

2. Exceptions to the 10-Year Rule: Certain "eligible designated beneficiaries" (EDBs), such as surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased, are exempt from the 10-year rule. These beneficiaries can still stretch distributions over their life expectancies until other conditions trigger the 10-year rule.

3. Increased RMD Age: The age for required minimum distributions (RMDs) was extended from 70½ to 72, giving account holders a bit more flexibility before they must start taking distributions​.

SECURE 2.0 Act of 2023: Further Adjustments

In 2023, the SECURE 2.0 Act introduced additional refinements, giving more flexibility but also adding complexity for inherited accounts:

1. RMD Age Increased to 73 (and Future Increase to 75): Starting in 2023, the RMD age was raised to 73, with a scheduled increase to 75 by 2033. This shift allows more time for retirement accounts to grow before mandatory distributions begin, benefiting account holders and potentially increasing what beneficiaries might inherit.

2. Clarification on the 10-Year Rule for Successive Beneficiaries: The 10-year rule remains but was clarified for EDBs who initially qualified for life expectancy payouts. Upon the death of an EDB, any remaining assets generally need to be distributed within ten years​​.

3. Elimination of Certain RMD Penalties: SECURE 2.0 temporarily suspended penalties for missed RMDs for specific beneficiaries, acknowledging that the rule changes might create confusion. Beneficiaries in certain circumstances now have a grace period to adjust their distributions without incurring penalties​.

4. New Opportunities for Roth Conversions: SECURE 2.0’s encouragement of Roth conversions aligns well with tax planning for beneficiaries. Roth accounts are not subject to RMDs during the original account holder’s life, potentially simplifying inheritance and enhancing the value for beneficiaries due to tax-free withdrawals​.

Practical Impact for Beneficiaries

The rapid changes brought by both SECURE Acts underscore the need for strategic planning:

• Beneficiary Designations Matter: Properly designating eligible beneficiaries can provide valuable flexibility under the new rules.

• Tax Planning for Heirs: Since distributions must often be taken within a shorter time, beneficiaries may face higher tax obligations. Strategies like Roth conversions can help mitigate this.

• Estate Plan Revisions: Account owners should review and possibly revise their estate plans to align with SECURE 2.0's distribution requirements and tax implications.

By staying informed and planning accordingly, beneficiaries can better manage inherited accounts under these complex rules. Consulting with an estate planning attorney or tax professional is highly advisable to navigate these changes effectively.