Tax Planning for Retirees

Required Minimum Distributions for Plans and IRAs

Ten-Year Deferral, and Fewer Life Expectancy Distributions, for Designated Beneficiaries. – The SECURE Act of 2019 has completely revamped the taxation of required minimum distributions made to designated beneficiaries of tax-favored plans for beneficiaries of retirees dying after 2019. Plans may now make distributions over the life expectancy of a beneficiary only if the beneficiary is an “eligible designated beneficiary” (EDB). EDBs are limited to (1) the surviving spouse of the retiree, (2) a minor child of the retiree, (3) a disabled individual, (4) a chronically ill individual, or (5) an individual who is not more than ten years younger the retiree. Designated beneficiaries who are not EDBs must take distribution of the entire plan benefit by the end of the tenth year following the death of the taxpayer. An EDB may also choose the ten-year limit in lieu of the life expectancy distribution. (IRC § 401(a)(9)(H); the SECURE Act of 2019, Pub. L. No. 116-94, § 401(a).) See Chapter 8 of the treatise.

New Limitations on Distributions to See-Through Trusts for Retirees Dying after 2019. – If a trust is one of the beneficiaries of a tax-favored plan, the tax law generally treats the plan as having no designated beneficiary for purposes of making required minimum distributions. A plan or arrangement without designated beneficiaries generally may not defer taxes for as long a period. However, for retirees dying before 2020 there was a significant exception for so-called “see-through” trusts. If all the beneficiaries of the see-through trust were designated beneficiaries, the plan or IRA could make distributions to the trust over the life expectancy of the oldest beneficiary. Unfortunately, for retirees dying after 2019, a plan may make such life expectancy distributions to a see-through trust only if all the beneficiaries of the trust are eligible designated beneficiaries (EBDs), as described in the item immediately above. (IRC § 401(a)(9)(H); the SECURE Act of 2019, Pub. L. No. 116-94, § 401(a).) See Chapter 8 of the treatise.

Applicable Multi-Beneficiary Trust for Disabled or Chronically Ill Beneficiaries. – An “applicable multi-beneficiary trust” (AMBT) is a trust with two or more beneficiaries, all of whom are treated as designated beneficiaries, and at least one of whom qualifies as an eligible designated beneficiary (EDB) because he or she is disabled or chronically ill. For beneficiaries of retirees dying after 2019, the Code now provides a safe harbor for the separation of an AMBT into separate trusts, to allow distributions to disabled or chronically ill EBDs under the life expectancy rule. Alternatively, if no beneficiary of an AMBT other than disabled or chronically ill EDBs has any right to plan benefits until the death of all the disabled or chronically ill EDBs, the plan may make distributions to the trust under the life expectancy rule, without separating the trust. (IRC § 401(a)(9)(H); the SECURE Act of 2019, Pub. L. No. 116-94, § 401(a).) See Chapter 8 of the treatise.

Required Beginning Date for Minimum Distributions Increased to Age 72. – For years after 2019, the required beginning date (RBD) for minimum distributions from tax-favored plans is increased from age 70½ to age 72. (The SECURE Act of 2019, Pub. L. No. 116-94, § 114.) See Chapter 8 of the treatise.

Minimum Distribution Flexibility for Certain Government Plans. –  Proposed regulations indicate that qualified governmental plans and eligible state/local plans have more latitude in complying with minimum distribution requirements than other types of plans. The proposed regulations treat these government plans as satisfying minimum distribution requirements if the plans comply with a reasonable and good faith interpretation of the Code – apparently, even if that interpretation is contrary to regulatory provisions. (Prop. Reg. § 1.401(a)(9)-1, Q&A 2(d).) See Chapter 8 of the treatise for minimum distribution requirements.

Beneficiary Designation by Judicial Reformation. – Beneficiaries of tax-favored retirement plans qualifying as “designated beneficiaries” may be eligible for longer distribution periods than other beneficiaries. However, a retiree may fail to properly name a designated beneficiary. In a private ruling, the IRS allowed an individual to become a designated beneficiary by reason of a state court reformation of a beneficiary designation form, at least where convincing evidence indicated that was consistent with the retiree’s original intention. However, in a more recent ruling, the IRS refused to recognize a trust reformation that attempted to eliminate non-individual beneficiaries of an IRA and thereby allow the post-mortem “creation” of designated beneficiaries. (Ltr. Ruls. 200616039 and 201021038.) See Chapter 8 of the treatise for a discussion of designated beneficiaries.

Separate Accounts Unavailable When Beneficiary Is a Decedent’s Estate. –Beneficiaries of a decedent’s estate may not treat as separate accounts their interests in a plan or inherited IRA held by them indirectly through the estate. “See through” rules do not apply to an estate. Thus, required minimum distribution rules are applied to such a plan or inherited IRA as a whole. The minimum distribution rules are applied in the aggregate even if funds in the plan or inherited IRA are directly transferred to several new inherited IRAs, each for the benefit of an individual beneficiary of the estate. (Ltr. Rul. 201128036.) See Chapter 8 of the treatise.

Non-Spouse’s Minimum Distribution Election Under Personally Purchased Annuity. – The tax law requires that a non-spouse beneficiary receive minimum distributions under a personally purchased annuity contract. However, the IRS has ruled that those minimum distribution requirements may be satisfied if a non-spouse beneficiary merely elects to be treated for tax purposes as if he or she had received the entire value of the annuity contract as of the retiree’s death. (Ltr. Rul. 201302015.) See Chapter 16 of the treatise for a discussion of personally purchased annuities.

Deaths of Decedent and Surviving Spouse in Quick Succession. – A retiree and his or her surviving spouse may both die within a short period of time, with the longer living spouse being the designated beneficiary of the retiree’s IRA. In that case, a disclaimer of the IRA by the executor of the now deceased surviving spouse may allow IRA distributions over the life expectancy of a younger successor beneficiary (e.g., their son) rather than the shorter life expectancy of the surviving spouse. However, the life expectancy distribution would be available only if the successor beneficiary qualified as an “eligible” designated beneficiary (i.e., the son was a minor, disabled, or chronically ill). (IRC § 401(a)(9)(H); Ltr. Rul. 201202042.) See Chapters 8 and 20 of the treatise for a discussion of disclaimers and minimum distributions.

Delayed Minimum Distribution Payments. – Tax-favored plans and arrangements generally must begin making minimum distributions to a retiree or beneficiary by a specified date. The IRS cannot  waive a delay in the making of a payment. However, the IRS may waive a penalty resulting from the delay if the delay was due to reasonable error that the retiree or beneficiary is taking reasonable steps to correct. (Ltr. Rul. 201417027.) See Chapter 8 of the treatise.

Purchase of Qualifying Longevity Annuity Contracts (QLACs). – New regulations authorize “qualifying longevity annuity contracts” (QLACs) that provide additional tax deferral for certain retirement plans and IRAs. The regulations allow deferral of QLAC payments until an advanced age. In addition, earlier required minimum distributions are necessarily smaller because the regulations exclude the value of QLACs from the account balance used to compute minimum distributions. Perhaps most importantly, QLACs provide some additional financial security for participants who outlive their life expectancies or suffer downturns in the equity markets.

A QLAC may be purchased for a plan participant by a qualified defined contribution plan, an eligible state/local government plan, or an IRA (other than a Roth IRA). A QLAC may start no later than the first day of the month after the participant attains age 85. The aggregate premiums for all QLACs benefiting a participant may not exceed certain dollar and percentage limitations. The QLAC must also satisfy all the usual minimum distribution requirements for annuities (other than starting by the required beginning date). (Treas. Reg. § 1.401(a)(9)-6, Q&A 17.) See Chapter 8 of the treatise.

New Life Expectancy Tables and a New Uniform Lifetime Table. – New life expectancy tables and a new Uniform Lifetime Table providing longer distribution periods apply for required minimum distribution purposes for calendar years beginning after 2021. Furthermore, if a post-2021 minimum distribution to a nonspouse beneficiary is required to be determined by reference to a life expectancy initially determined for a year before 2022, that life expectancy is redetermined under the new tables as if the new tables were effective for the pre-2022 year of initial determination. The new life expectancy period is then reduced by one for each year elapsed since the pre-2022 year of the initial determination. For a surviving spouse, however, the distribution period is determined anew under the new tables for each distribution year after 2021. (Treas. Reg. § 1.401(a)(9)-9.) See the Appendix to the treatise.

The new tables also apply to the safe harbor methods for computing substantially equal periodic payments that avoid the penalty on premature distributions from IRAs, retirement plans, and commercial annuities. However, the new tables are generally not applicable until years after 2022 for this purpose. Nevertheless, taxpayers have the option to use the new tables for substantially equal payments beginning in 2022. Furthermore, in any year after 2021, taxpayers may change to the new tables even if substantially equal payments commenced before 2022. (Rev. Rul. 2022-6, 2002-5 I.R.B. ___.)

Suspension of Minimum Distribution Requirements for 2020. – Congress has eliminated minimum distribution requirements for 2020 for tax-favored plans that are individual account plans (i.e., are not defined benefit plans). Thus, a retiree who chooses to take distributions in 2020 from such a tax-favored plan may roll over even the portion that would have been a required minimum distribution absent the suspension of the requirement. Although the plan is not required to make trustee-to-trustee transfers of such amounts, it may do so if it chooses. In addition, the direct distribution of such amounts to a retiree by the plan is not subject to the normal 20 percent tax withholding, and the retiree may elect to eliminate other types of withholding tax.

In addition, a retiree whose required beginning date (RBD) is April 1, 2020 need not take a minimum distribution for 2019, unless the retiree already did so in 2019. After 2020, the retiree’s RBD must be determined in the usual way without regard to the 2020 suspension. The retiree’s beneficiary must also use the retiree’s normal RBD to determine the applicable method for determining minimum distributions. In addition, if the five-year minimum distribution rule applies to a beneficiary, the beneficiary does not count 2020 as one of the five years. For example, the five-year period ends in 2023, instead of 2022, for a retiree who died in 2017. The new ten-year distribution period for designated beneficiaries is unchanged. (I.R.C. §§ 401(a)(9)(I), 402(c)(4).) See Chapter 8 of the treatise for a discussion of required minimum distributions.