Retirement topics - Beneficiary

Beneficiaries of retirement plan and IRA accounts after the death of the account owner are subject to required minimum distribution (RMD) rules. A beneficiary is generally any person or entity the account owner chooses to receive the benefits of a retirement account or an IRA after they die. The owner must designate the beneficiary under procedures established by the plan. Some retirement plans require specific beneficiaries under the terms of the plan (such as a spouse or child).

Beneficiaries of an IRA, and most plans, have the option of taking a lump-sum distribution of the inherited account at any time. Beneficiaries must include any taxable distributions they receive in their gross income.

How beneficiary RMDs are determined

The factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include:

• Whether the account owner died after 2019 (the SECURE Act made changes to the RMDs for beneficiaries if the death of the account holder occurred after 2019).
• The relationship of the beneficiary to the account owner and certain characteristics (spouse, minor child, disabled or chronically ill individual, entity other than an individual)
• Whether the original account owner died before or after their required beginning date (the first date the original account owner was required to begin taking RMDs).

The spouse of the account owner has more options than non-spouse beneficiaries, if they're the sole beneficiary. Determination of whether the spouse is the sole beneficiary is made by September 30 of the year following the year of the account holder's death.

For the year of the account owner's death, the RMD due is the amount the account owner was required to withdraw and did not withdraw before death, if any. Beginning the year following the owner's death, the RMD depends on certain characteristics of the designated beneficiary and the distribution option chosen by the beneficiary.

Death of the account holder occurred before 2020

Spousal beneficiary options

If the death of the account holder occurred prior to the required beginning date, the spousal beneficiary's options are:

• Keep as an inherited account
  • Take distributions based on their own life expectancy, or
  • Follow the 5-year rule

  If the death of the account holder occurred after the required beginning date, the spousal beneficiary's options are:

  • Take distributions based on their own life expectancy
    • No 5-year rule available

    Non-spouse beneficiary options

    If the account holder's death occurred prior to the required beginning date (or if the account is a Roth IRA), the non-spouse beneficiary's options are:

    • Take distributions based on their own life expectancy, beginning the end of the year following the year of death, or
    • Follow the 5-year rule

    If the account holder's death occurred after the required beginning date, the non-spouse beneficiary may:

    • Take distributions based on the longer of their own life expectancy or the account owner's remaining life expectancy.

    Death of the account holder occurred in 2020 or later

    Spousal beneficiary options

    If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:

    • Keep as an inherited account
      • Delay beginning distributions until the employee would have turned 72
      • Take distributions based on their own life expectancy
      • Follow the 10-year rule

      If the account holder's death occurred after the required beginning date, the spouse beneficiary may:

      • Keep as an inherited account
        • Take distributions based on their own life expectancy, or

        Non-spouse beneficiary options

        In 2020 and later, options for a beneficiary who is not the spouse of the deceased account owner depend on whether they are an "eligible designated beneficiary." An eligible designated beneficiary is

        • Spouse or minor child of the deceased account holder
        • Disabled or chronically ill individual
        • Individual who is not more than 10 years younger than the IRA owner or plan participant

        An eligible designated beneficiary may

        • Take distributions over the longer of their own life expectancy and the employee's remaining life expectancy, or
        • Follow the 10-year rule (if the account owner died before that owner's required beginning date)

        Designated beneficiary (not an eligible designated beneficiary)

        • Follow the 10-year rule

        Beneficiary that is not an individual

        • Follow the rules described above as if the account owner died before 2020 (because the SECURE Act changes only apply to beneficiaries who are individuals)

        Definitions

        5-year rule: If a beneficiary is subject to the 5-year rule,

        • They must empty account by the end of the 5th year following the year of the account holders' death
        • 2020 does not count when determining the 5 years
        • No withdrawals are required before the end of that 5th year

        10-year rule: If a beneficiary is subject to the 10-year rule,

        • Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death
        • Relief under Notice 2022-53 for beneficiaries subject to the 10-year rule
          • The IRS will not treat a beneficiary of an inherited account in a plan or IRA who was subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD

          Eligible designated beneficiary

          • Spouse or minor child of the deceased account holder
          • Disabled or chronically ill individual
          • Individual who is not more than 10 years younger than the IRA owner or plan participant

          Designated beneficiary

          • Any individual designated as the beneficiary of an IRA or retirement plan

          Required beginning date

          • The first date the original account owner was required to begin taking RMDs

          Inherited Roth IRAs

          Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

          Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

          Distributions to beneficiaries from qualified retirement plans

          If the distribution is from a qualified retirement plan, such as a 401(k) or profit-sharing plan, the plan document establishes the distribution options available to satisfy the RMD rules. The plan administrator should provide the beneficiaries with their distribution options. If the beneficiary is the spouse of the account owner, they may have more distribution options available to them in the plan than a non-spouse beneficiary. Beneficiaries should contact the plan administrator for distributions from a qualified plan.

          Income tax on distributions from a retirement plan

          Generally, a beneficiary reports pension or annuity income in the same way the plan participant would have reported it. However, some special rules apply.

          A beneficiary of an employee who was covered by a retirement plan can exclude from income a portion of nonperiodic distributions received that totally relieve the payer from the obligation to pay an annuity. The amount that the beneficiary can exclude is equal to the deceased employee's investment in the contract (cost).

          If the beneficiary is entitled to receive a survivor annuity on the death of an employee, the beneficiary can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. The beneficiary must figure the tax-free part of each payment using the method that applies as if he or she were the employee.

          Benefits paid to a survivor under a joint and survivor annuity must be included in the surviving spouse's gross income in the same way the retiree would have included them in gross income.