Key Questions to Determine Beneficiary Options
By Lisa Haberman, MBA, MAM, ChFC, CLU
Helping clients determine distribution options after a loved one dies may seem overwhelming, but there are a few simple questions that can guide you to the appropriate options if the individual had assets in an individual retirement arrangement (IRA) or an employer-sponsored retirement plan, such as a 401(k) plan or 403(b) plan.
It’s important to focus initial questions on when the account owner was born, when she died, and—with the exception of Roth IRAs—if the individual had started receiving required minimum distributions (RMDs) at the time of death. Once this information is collected, it is essential to understand who or what entity is listed as the primary beneficiary. The answers to these questions will determine which distribution options are available to beneficiaries.
What is the account owner’s date of birth?
This first question will help you determine the account owner’s required beginning date (RBD) for taking RMDs. If the account owner was born before July 1, 1949, the RBD is April 1 following the year that the account owner turns age 70. If the account owner was born on or after July 1, 1949, the RBD is April 1 following the year that the account owner turns age 72.
When did the account owner die?
The next question to ask an executor or beneficiary is when did the account owner die? This question is important because the distribution options will depend on whether the individual died 1) before, or 2) on or after January 1, 2020, which is the effective date for the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation brought significant changes to beneficiary distribution options.
If the account owner died before January 1, 2020, did the individual die before, or on or after the RBD?
If the account owner died before January 1, 2020, the second question to ask is did the individual die before, or on or after the RBD? If the account owner died before the RBD, beneficiaries may use the 5-year rule, which allows distributions to be taken in any amount at any time as long as the entire balance is depleted by December 31 of the year containing the fifth anniversary of the account owner’s death. This option is not available if the account owner died on or after his RBD.
See IRA Beneficiary Options for Deaths Before January 1, 2020, for information on other beneficiary distribution options.
If the account owner died on or after January 1, 2020, what type of beneficiary is named?
If the account owner died on or after January 1, 2020, the next question to ask is what type of beneficiary is named? Is the original beneficiary considered a designated beneficiary, an eligible designated beneficiary, or a nonperson beneficiary? This question is important because the distribution options will vary depending on the type (or types) of beneficiaries involved.
One of the most significant changes the SECURE Act made was to eliminate life expectancy payments as a distribution option for designated beneficiaries, the broad category of individuals who are not eligible designated beneficiaries (i.e., spouse beneficiaries, minor children of the account owner, disabled individuals, chronically ill individuals, individuals not more than 10 years younger than the account owner, and beneficiaries of account owners who died before January 1, 2020). Before the SECURE Act, nonspouse beneficiaries, including adult children, were able to stretch their distributions and related tax obligations over their life expectancies. Post-SECURE Act, designated beneficiaries are limited to the 10-year rule, which requires beneficiaries to withdraw the entire balance of the account by December 31 of the year that includes the 10th anniversary of the account owner’s death.
Does the proposed “At Least As Rapidly” Rule apply?
The IRS issued proposed RMD regulations in February 2022, which included the “At Least As Rapidly” rule. The proposed rule requires beneficiaries to take distributions at least as rapidly as the deceased account owner if the account owner died on or after the RBD. This rule requires beneficiaries who are subject to the new 10-year rule to take annual life expectancy payments during the first nine years and a total distribution by December 31 of the year containing the 10th anniversary of the account owner’s death. This rule is a departure from the manner in which the 5-year rule is administered.
Please refer to IRA Beneficiary Options for Deaths On or After January 1, 2020, and Determining Beneficiary Options, Post-SECURE Act for more details on other beneficiary distribution options.
Key Takeaways
Knowing which questions to ask can make a difficult situation less stressful for your clients. It can also help your organization become more efficient at distributing IRA and employer-sponsored retirement plan assets. If you haven’t already, take some time to review the different beneficiary options that are available and how they could affect your clients.
