The IRS released the final regulations to the SECURE Act on July 18, 2024. Although regulations mostly mirror the 2022 proposed regulations, they include some clarifications and changes. Below is a summary of the most significant changes that may impact your retirement and estate planning:
1. Roth Accounts
The final regulations provide that amounts held in Roth IRAs are excluded when calculating RMDs during the account owner’s lifetime.
2. Changes to Required Beginning Date (RBD)
SECURE 2.0 adjusts the RBD for account owners. After 2022, the RBD will rise from 72 to 73 years old. After 2032, the RBD will rise to age 75. This provides more time for individuals to defer taking required minimum distributions (RMDs), which allows retirement assets to grow for a longer period.
3. 10-Year Rule for Designated Beneficiaries (DBs) when Account Owner Dies on or after Required Beginning Date (RBD)
If the account owner dies on or after the RBD, a designated beneficiary must take distributions over the 10-year period. Beneficiaries who are not “Eligible Designated Beneficiaries” (EDBs) must deplete the retirement account by December 31 of the tenth year after the account owner dies. Beneficiaries who are EDBs must continue taking annual payments until the beneficiary is no longer an EDB (for example after the child of the account owner reaches the age of majority), after which, final distribution must occur within the following 10 years.
4. 10-Year Rule for Designated Beneficiaries (DBs) when Account Owner Dies before RBD
If the accountholder died before his or her RBD (or if the accountholder’s entire plan balance was in a designated Roth account), the designated beneficiary does not need to take RMDs and may wait until the 10th year to withdraw the funds.
5. Special Treatment for Spouses
Surviving spouses can roll over a retirement plan or take distributions based on their life expectancy. Additionally, a surviving spouse will also have the option to step into the shoes of their deceased spouse, which will allow them to delay taking required minimum distributions until the date their deceased spouse would have reached the RBD, and have the surviving spouse’s beneficiaries treated as the deceased spouse’s beneficiaries if the surviving spouse passes away before distributions begin.
6. Expanded Definition of “Child” for Eligible Designated Beneficiaries
The final regulations expand the definition of “child” to include stepchildren and eligible foster children. This change ensures broader protection for minors under the EDB provisions, aligning more families with beneficial distribution rules.
7. Charities as Remainder Beneficiaries for Special Needs Trusts
A key update under SECURE 2.0 allows a charity to be named as the remainder beneficiary of a “Type II Applicable Multi-Beneficiary Trust” for a disabled beneficiary, typically a special needs trust.
8. Trusts with Multiple Minor Children
If a retirement account is left to a trust with multiple minor children, the distribution deadline is delayed until ten years after the youngest of the account owner’s children reaches age 21. The deadline was previously based on the age of the oldest child.
9. Separate Account Rule for Trust Beneficiaries
A major update in the final regulations extends the “separate account rule” to trusts if the trust terms call for immediate division into separate trusts after the account owner dies. This rule allows each subtrust to be treated individually, which prevents all beneficiaries from being subject to the oldest beneficiary’s life expectancy for RMD purposes. In the past, the separate account rule applied only when the beneficiary designation directed plan interests to separate individuals or separate see-through trusts.
10. Flexibility in Distributions After the Owner’s Death
The final regulations offer flexibility in distributing the RMD of a particular retirement account in the year of the owner’s death. Rather than having to divide the amount proportionately among all beneficiaries of that account, the distribution can be made to any one beneficiary.
The End of the Stretch IRA for Most Beneficiaries
Before the SECURE Act took effect on January 1, 2020, most beneficiaries could take distributions from an inherited IRA over their own life expectancy. An 18-year-old with a 65-year life expectancy could stretch distributions over 65 years, minimizing taxable withdrawals and letting the account keep growing tax-deferred.
The SECURE Act ended that for most beneficiaries. Most designated beneficiaries must now empty an inherited account within ten years of the owner’s death. The exceptions, called eligible designated beneficiaries, are a surviving spouse, the owner’s minor children until they reach majority, disabled or chronically ill beneficiaries, and beneficiaries not more than ten years younger than the owner.
Conduit vs. Accumulation Trusts
Many estate plans leave retirement accounts to trusts for asset protection. Older plans often used conduit provisions, which require the trustee to pass every distribution straight to the beneficiary. Under the ten-year rule, a conduit trust can end up paying the entire account to the beneficiary within ten years, which may defeat the reason the trust was created.
An accumulation trust lets the trustee keep distributions in the trust and decide when to pay them out. The trade-off is income tax: retirement distributions kept in a trust are taxed at trust rates, which reach the top 37 percent bracket at a little over $16,000 of income (in 2026). For many families, protecting the money from a beneficiary’s creditors, divorce, or poor judgment is worth that cost, but the decision should be made deliberately. If your plan leaves retirement assets in trust and was signed before 2020, it should be reviewed.
Planning Strategies to Consider
- Roth conversions. Converting a traditional IRA to a Roth IRA means paying income tax now, but distributions to beneficiaries, including to an accumulation trust, are generally tax-free.
- Life insurance. Some owners withdraw part of an IRA to buy life insurance payable to a trust, which avoids the retirement distribution rules altogether.
- Charitable remainder trusts. Naming a charitable remainder trust as IRA beneficiary can provide a beneficiary with payments for life, with the remainder going to charity.
Each strategy has drawbacks, so it should be evaluated with your financial advisor and estate planning attorney together.
Protecting an Inherited IRA From Creditors
Your own IRA is generally protected from creditors in bankruptcy. An inherited IRA is different. In Clark v. Rameker (2014), the U.S. Supreme Court unanimously held that inherited IRAs are not “retirement funds” under federal bankruptcy law, because the beneficiary cannot contribute to them, must take withdrawals regardless of age, and can withdraw the whole balance without penalty.
Texas law is more protective. Section 42.0021 of the Texas Property Code exempts inherited IRAs from creditors’ claims. But a debtor generally must have lived in a state for two years before filing for bankruptcy to use its exemptions, and you cannot know where your beneficiaries will live. Leaving an IRA to a properly drafted retirement benefits trust, instead of outright, is the more reliable way to protect it from a beneficiary’s creditors, lawsuits, and divorce. See beneficiary designations.
What This Means for You
These regulations, go into effect beginning on January 1, 2025. If you have retirement accounts, these updates may impact how and when distributions must be made to your beneficiaries and could affect your overall estate plan.
