Recent Changes Reduce Time for Required Distributions After Death

Under prior law, distribution of all plan assets could be delayed well beyond 10 years after the account owner’s death. For instance, in the case of a designated beneficiary, distributions could be made over the actuarial life expectancy of the beneficiary. This commonly is referred to as a “stretch” distribution, because the payments could stretch over the person’s lifetime, which might be several decades. Shorter distribution periods applied in the case of a beneficiary that is not a designated beneficiary, including an account owner’s estate or a trust that has as a beneficiary a charity, an entity (such as a corporation or partnership), or an account owner’s estate. 

Under the new law, most designated beneficiaries must withdraw plan assets by Dec. 31 of the 10th year after the account owner’s death.

Designated beneficiaries who might still qualify for prior law deferral include:

• A surviving spouse
• A person who is disabled under IRC Section 72(m)(7)
• A person who is chronically ill under IRC Section 7702B(c)(2) with modification
• An individual who is not more than 10 years younger than the account owner
• A child who has not reached the age of majority under IRC Section 401(a)(9)(F)

The eligibility for a minor child is only temporary, however, because the new law requires that the entire plan balance must be distributed within 10 years after the child reaches majority.

In some cases, the new rules apply even to plans for which the original account owner died before Dec. 31, 2019. Specifically, if a designated beneficiary who was receiving distributions over his or her lifetime dies after Dec. 31, 2019, the successor beneficiary now must withdraw all the plan assets within 10 years of the date of death of the original beneficiary. In general, the new law does not change the rules regarding minimum required distributions to the account owner during his or her lifetime, distributions to a spouse, or distributions to a beneficiary that is not a designated beneficiary.

Looking ahead

The new rules have the potential to undermine the intended goals of existing IRAs and 401(k) plans by shortening the period over which plan assets can be distributed. Taxpayers should examine plan benefits payable to trusts because these beneficiaries might no longer be eligible for stretch payments as a result of the new law. Given that the new rules are currently effective, individuals should not wait to review their existing plans with their tax adviser to ensure that their planning goals are accomplished under the new rules.