Avoiding Tax Liability with Qualified Beneficiary Designations

Prior to the SECURE Act, it was always important to ensure that a qualifying beneficiary designation was made to IRAs and other qualified retirement accounts. This could be an individual or a trust with the appropriate provisions that would allow the qualified retirement account to extend the tax-deferred benefits of the retirement account, commonly referred to as the “stretch.”

If there were no qualified beneficiary designation when the owner of the IRA account died, the inherited IRA would be subject to tax liability within five years—by December 31 of the year of the fifth anniversary of the owner’s death. This was common in situations where the owner either had no living beneficiary or named a non-qualifying trust as beneficiary.

The 2019 SECURE Act

Under the SECURE Act, all designated beneficiaries (other than eligible beneficiaries) are subject to the 10-year payout rule, which dictates that the inherited IRA must be distributed to the beneficiary within 10 years of the IRA owner’s death. The distributions are also subject to income tax.

However, an “eligible beneficiary” can take advantage of the tax-deferred benefit, delay the distributions, and in certain cases, avoid the 10-year payout rule.

If there is no living beneficiary designated, then the 5-year rule still applies under the SECURE Act.

Eligible Designated Beneficiaries

The following are eligible designated beneficiaries entitled to stretch the 10-year rule:

• Surviving spouse of the deceased retirement account owner
• A minor child of the deceased account owner (however, the 10-year payout rule applies once the beneficiary reaches the age of majority)
• A beneficiary who is not more than 10 years younger than the deceased account owner
• A beneficiary who is disabled or chronically ill

Given the fact that a surviving spouse is an eligible designated beneficiary, it is a good idea to consider naming your spouse as the designated beneficiary on your IRAs.

A Broader Look at the 2019 SECURE Act

SECURE Act reforms affected retirement plans in several ways, including:

• Ending the maximum age to contribute to a traditional IRA
• Raising the required minimum distribution age to 72
• Enabling some part-time employees to participate in company 401(k) plans
• Permitting penalty-free withdrawals up to $5,000 for funds used for qualified birth or adoption expenses
• Allowing parents to make withdrawals up to $10,000 from qualified 529 college savings plans for student loan repayment
• Increasing small employer access to retirement plans
• Expanding annuity options inside of retirement plans

The SECURE 2.0 Act Changes for 2023

There were some changes made to the original legislation that began in 2023, including:

• Raising the minimum distribution age to 73 and to 75 by 2033
• Reducing excise taxes from 50% to 25%, and an additional 10% if done timely for situations regarding birth and adoption expenses, terminally ill individuals, federally declared disasters, emergency personal expenses, and victims of domestic violence
• More flexibility with commercial annuities and partial annuities purchased by an IRA or other retirement plan, along with expanded exemptions for Qualified Longevity Annuity Contracts (QLACs)
• Exempting eligible designated beneficiaries of special needs trusts from the 10-year limitation on distributions

These updates to the SECURE Act legislation are complex. Give us a call to discuss how we can help pass your retirement assets to your beneficiaries as smoothly as possible. We explain what to consider when selecting beneficiaries and may recommend changing your beneficiary designations to take advantage of tax planning strategies.

The knowledgeable and compassionate team at Russo Law Group, P.C., provides professional services and advice regarding retirement and recent tax law changes. Take advantage of our comprehensive website as well as our free seminars and webinars to learn more about how Russo Law Group, P.C. provides peace of mind. Please contact our law firm to speak with one of our experienced elder law and estate planning attorneys today at 1 (800) 680-1717.