The article is reprinted with permission from Leimberg Information Services, Inc. (LISI).
By Michael Jones, CPA
Before a surviving spouse makes a rollover of a deceased spouse’s qualified retirement account or individual retirement account, the special rule that applies to surviving spouses regarding when required minimum distributions (RMDs) must commence must be considered. The SECURE Act made changes to those rules.
In the Wake of the SECURE Act
Before the effective date of the SECURE Act, where a deceased participant’s surviving spouse was the death beneficiary of the deceased spouse’s retirement account, the time when RMDS to a surviving spouse must commence under Internal Revenue Code Section 401(a)(9)(b)(iv) was the later of two dates:
- December 31 of the year after the year when the participant dies; or,
- The date when the decedent would have attained age 70 ½, the attained age to which the participant’s lifetime Required Beginning Date was keyed.
The SECURE Act's section 114 raised the attained age to which the participant’s lifetime required beginning date (RBD) is keyed from age 70 ½ to age 72. Accordingly, for purposes of the spousal rule, the two dates became:
- December 31 of the year after the year when the participant dies; or, if later
- The date when the deceased participant would have attained age 72.
The SECURE Act's section 114 states that its provisions relating to RMDs “shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.” The reference to “individuals” appears to mean the plan participant, since the RBD is determined by reference to the plan participant’s age alone.
Question: Is the spouse’s required commencement date based on the year when the participant would have attained age 72 instead of 70 ½, where:
- A married participant named her spouse as her retirement account’s designated beneficiary,
- The participant died before the SECURE Act’s effective date and prior to reaching her Required Beginning Date (based on age 70 ½),
- The participant would have attained age 70 ½ after the SECURE Act’s effective date, and
- The participant’s spouse survives the participant?
At least one commentator has suggested that is so. If that interpretation is incorrect, the 50 percent tax on failure to satisfy an RMD will apply, unless the IRS waives the penalty for reasonable cause.
The Act’s effective date specification, "with respect to individuals who attain age 70 ½ after such date" (emphasis added) means a plan participant who attains such age. No effective date rule was expressly provided for spouses of plan participants where the plan participant would have attained age 70 ½ after the effective date.
To apply the spousal rule as in effect before 2020, it must first be determined whether the participant died before reaching age 70 ½. If a participant had reached that age on or before December 31, 2019, the spousal rule isn’t available. The SECURE Act’s change to age 72 can’t somehow flip that result for 2020 and beyond.
The law in effect when the participant dies survived by a spouse fixes the age of the participant both for purposes of determining whether the participant died before reaching the RBD, as well as for applying the spousal rule. As a result, in the case where:
- A participant dies after December 31, 2019 and
- The participant’s surviving spouse is the death beneficiary of the participant’s account,
the spouse’s required commencement date is the December 31 of the year after the year when the participant dies, or, if later, the date when the participant would have attained age 72 had the participant survived.
On the other hand, in the case where the participant died before January 1, 2020 (before the effective date) and the participant isn’t over age 70 ½ at the time of death, the SECURE Act did not expressly provide that, in such a case, the surviving spouse could wait until the deceased spouse would have attained age 72. Since the SECURE Act didn’t provide a different rule in such a case, the terms of the spousal rule in effect when the participant died will control. Were it otherwise, some surviving spouses could now stop taking distributions until the deceased participant spouse would have attained age 72. There’s nothing suggesting Congress meant to create a holiday for surviving spouses; it seems more likely Congress had no such intention.
As another point of perspective, consider to what extent the pre-act rule might have been affected if Congress had lowered age 70 ½ to, say, age 68, instead of increasing it to 72. In that case, surviving spouses of participants who died between ages 68 and 70 ½ and before the effective date would surely argue that the change could not somehow apply retroactively to them.
Another aspect of a surviving spouse’s sole designated beneficiary status affects RMDs of the surviving spouse’s successor: If the surviving spouse dies after the employee and before the date on which distributions have begun to the surviving spouse, the spousal rule in Code section 401(a)(9)(B)(iv)(II) will apply to the surviving spouse’s successor.
Treasury Regulations Section 1.401(a)(9)-4, Q&A-4(B) explains that, under that rule, the designated beneficiary who was named by the surviving spouse becomes the relevant designated beneficiary for determining the distribution period following the surviving spouse’s death. Similar to the rule for determining the designated beneficiary of the original plan participant, the beneficiary designated by the surviving spouse will be determined based on the beneficiaries designated as of the date when the surviving spouse died and who remain as beneficiaries as of September 30 of the calendar year following the calendar year during which the surviving spouse died. The regulation further points out that, if, as of that September 30, there is no designated beneficiary under the plan with respect to that surviving spouse, distribution must be made in accordance with the five-year rule.
On the other hand, if the spouse dies at a later time, the SECURE Act’s 10-year rule and its exceptions apply to the designated beneficiary who takes after the spouse dies.
Hopefully, guidance from Treasury will provide transition clarification regarding the increased age to which a participant’s RBD is keyed when the account passes solely to the participant’s surviving spouse.
For more read Internal Revenue Code Section 401(a)(9)(b)(iv); SECURE Act Section 114; Treasury Regulations section 1.401(a)(9)-4.
About the author: Michael J. Jones, CPA is a partner in Monterey, California’s Thompson Jones LLP (www.thompsonjones.com). His tax consulting practice focuses on tax-efficient wealth transfer strategy, trust and probate tax matters (both administration and controversy resolution), and family business transitions. Mike is the author of four books, including Inheriting an IRA and Inheriting an IRA Professional Edition. He has written over 170 articles published in Trusts & Estates, Leimberg Information Services, Inc., Ed Slott’s IRA Newsletter and elsewhere. He serves as chair of Trusts & Estates magazine’s Retirement Benefits Committee and the CPE Forum of the Central Coast. He has lectured across the U.S. for Jerry A. Kasner Estate Planning Symposium; Southern California Tax & Estate Planning Forum, Hawaii Tax Institute, AICPA Advanced Estate Planning Conference, AICPA Conference on Tax Strategies for the High-Income Individual, UCLA-CEB Estate Planning Institute, New York University Institute on Federal Taxation, CEB Estate Planning and Administration Annual Updates panels, and others. He has been quoted in Natalie Choate’s Life and Death Planning for Retirement Benefits, Keith Schiller’s Estate Planning At The Movies® — Art of the Estate Tax Return, New York Times, Forbes Magazine, The Wall Street Journal, Bloomberg Financial Report and others.
The article, which is reprinted with permission from Leimberg Information Services, Inc. (LISI), originally appeared in the LISI Employee Benefits & Retirement Planning Newsletter #736 (May 14, 2020) at http://www.leimbergservices.com