Of all the many provisions in the SECURE 2.0 Act, none has been more perplexing than Section 327, which changed the rules for spouse beneficiaries. It has been hard to figure out what Congress intended in drafting section 327. The legislative history is scant. On July 18, the IRS issued proposed regulations on the required minimum distribution (RMD) rules from the SECURE 2.0 Act. One significant part of these proposed regulations is the IRS’s interpretation of Section 327.
The Senate Finance Committee Report, which explains the provisions of SECURE 2.0, said only the following: “Section 327 allows a surviving spouse to elect to be treated as the deceased employee for purposes of the required minimum distribution rules.”
But what exactly does allowing the surviving spouse to be treated as the deceased spouse mean?
The statute is not clear, but in the newly released proposed regulations, the IRS explains the rules.
Under the proposed regulations, a surviving spouse can delay RMDs until the IRA owner would have reached the age when RMDs must start (currently age 73). When death is before the required beginning date (RBD – currently April 1 of the year after the year a person reaches age 73 for most), this happens automatically.
When RMDs start on this inherited IRA, the surviving spouse beneficiary will calculate RMDs using their age and the Uniform Lifetime Table. The use of the Uniform Lifetime Table to calculate spousal beneficiary RMDs is new and will result in smaller RMDs. This table has only previously been used to calculate RMDs during an individual’s lifetime.
The new regulations also make it clear that when 327 applies, the IRA is still considered an inherited account. This means that the 10% early distribution penalty does NOT apply, which is good news for young spouse beneficiaries who may need the money. Also, in more good news, despite the automatic inherited IRA creation, the regulations clarify that a spousal rollover can still be done at any point.
Example: Derek dies in 2024 at age 50. His beneficiary is his spouse, Katie, who is age 54. Katie will not have to take RMDs on the automatically created inherited IRA until Derek would have been required to start taking them. This will allow her to delay RMDs for decades. When she starts taking RMDs, she will use her age and the Uniform Lifetime Table.
Katie can take distributions at any time from the inherited account. These distributions will always be penalty-free regardless of her age. She can do a spousal rollover to her own IRA at any time.
Proposed Regs Bring New Rules for Spouses Beneficiaries When Death is Before the RBD
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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