Beneficiary Options

[Kathleen Reynolds]

#3214

If death is 12/31/2019 or before (prior to Secure Act)

If the IRA Owner dies before the Required Beginning Date (RBD):- if death is 12/31/2019 or before (prior to Secure Act)

• There are no Required Minimum Distributions (RMD) for the owner
• Beneficiary Options are:
  1. Life expectancy option:
     • Nonspouse beneficiary (nonrecalculated): Must take first RMD by December 31 of year following the owner’s death.
     • Spouse beneficiary (recalculated): Must take first RMD by the later of December 31 of the year after the owner’s death or the year the owner would have reached age 70½ had he lived.
  2. Five year rule. Under this option, distributions are discretionary, until the end of the 5th year when the entire balance must be distributed.
     Example: IRA owner turns 70.5 in 2018, His RBD is April 1, 2019. He died on March 31, 2019. Therefore, he died before the RBD. No RMD is due for the IRA owner, because he died before the RBD, April 1, 2019.The beneficiary can take distributions:
     • Over his (the beneficiary’s)life expectancy (nonrecalculated). Life expectancy set in 2020. Distributions must be taken by December 31, 2020.
     • Within five years. Distributions are optional until December 31, 2025 when the entire balance must be distributed.

 

If the IRA Owner dies on or after the RBD:

• The RMD for year of death must be taken for the owner. If the owner did not take the RMD, then the beneficiary must take the RMD. This RMD is calculated as if the owner is still alive, even if taken after death.
• Beneficiary Options are:
  Life expectancy option. Over the longer of:
  • Remaining Life expectancy (nonrecalculated) of decedent, set in year of death.
  • Life expectancy of beneficiary set in year following year of death. Nonrecalculated for nonspouse, recalculated for spouse.

  The beneficiary must take first (beneficiary RMD) by December 31 of the year after the owner’s death.
  Example: IRA owner turns 70.5 in 2019, His RBD is April 1, He died on or after April 1, 2020. He died on or after April 1, 2020. Therefore, he died on or after the RBD. An RMD for 2020 is due for the IRA owner, because he died on or after the RBD.
  The beneficiary may take distributions over the longer of:

  • The remaining life expectancy of the decedent. This is set in the year of death and nonrecalculated.
  • The life expectancy of the beneficiary. Nonrecalculated for nonspouse, which is set in the year following the year of death. Recalculated for spouse.

 

Distributions for the nonspousal beneficiary must start by December 31, 2021. RMDs are due for 2019 and 2020 using the owner’s life expectancy.

 

If death is 1/1/2020 or after (Secure Act)

• There are no Required Minimum Distributions (RMD) for the owner
• Beneficiary Options are:
  1. Life expectancy option:
     • Nonspouse beneficiary (nonrecalculated): Must take first RMD by December 31 of year following the owner’s death, if the beneficiary is exempt from the 10 year rule. Exemptions include: disability, chronically ill, beneficiary is legal minor child of owner, or beneficiary age is less than 10 years younger than the owner. Note: if the beneficiary is a legal minor child, they will be exempt status until they reach age of majority declared by the residing state; after they reach this age, their exemption status will no longer be intact, and will follow non exempt status rules. If the beneficiary is NOT exempt, then the plan balance must be distributed by the 10th anniversary of the plan owner’s death. In the case of a non exempt beneficiary, there are no required distributions during the first 9 years, but the rule requires that the plan be completely distributed in the 10th year.
     • Spouse beneficiary (recalculated): Must take first RMD by the later of December 31 of the year after the owner’s death or the year the owner would have reached age 72; had he lived.
  2. Five year rule. Under this option, distributions are discretionary, until the end of the 5th year when the entire balance must be distributed.
     Example: IRA owner turns 72 in 2020, His RBD is April 1, 2021. He died on March 31, 2021. Therefore, he died before the RBD. No RMD is due for the IRA owner, because he died before the RBD, April 1, 2021.The beneficiary can take distributions:
     • Over his (the beneficiary’s)life expectancy (nonrecalculated). Life expectancy set in 2021. Distributions must be taken by December 31, 2021.
     • Within five years. Distributions are optional until December 31, 2026 when the entire balance must be distributed.

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