Retirement Plan Spousal Beneficiary Changes Under SECURE 2.0

The federal Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in 2019 to increase access to tax-advantaged retirement accounts, and to help ensure that aging Americans didn’t outlive their retirement savings. The Consolidated Appropriations Act of 2023, which passed at the end of 2022, contains provisions intended to further the goals of the SECURE Act. Those provisions are known, collectively, as “SECURE 2.0.”

SECURE 2.0 contains numerous provisions designed to help people save more for retirement and to allow those savings to grow for a longer period. In this blog post, we will focus on how SECURE 2.0 affects spousal beneficiaries of retirement plans.

Retirement Plans and Spousal Beneficiary Changes

Many retirement plan owners name their spouse as the primary beneficiary of 100% of their retirement plans. Upon the death of the plan owner, the surviving spouse can choose to take a “spousal rollover” of the plan, making them the new owner of the plan.

The surviving spouse would be allowed to take Required Minimum Distributions (RMDs) from the plan each year, with the amount of the distribution based on the value of the account divided by the number of years remaining in the surviving spouse’s life expectancy. In addition, the surviving spouse could make new beneficiary designations for the plan, changing who would inherit the plan upon their own death.

But what happens if the original plan owner doesn’t want their surviving spouse to be able to change beneficiaries? For instance, in the case of a blended family, the original plan owner might want their surviving spouse to receive distributions from the plan upon their death, but might want their own children to become beneficiaries of the plan upon the death of the surviving spouse.

In that scenario, or any case in which the original plan owner doesn’t want their spouse to change plan beneficiaries after their death, another approach is called for. The plan owner could create a retirement plan trust with a marital sub-trust for the benefit of the surviving spouse; separate share sub-trusts would be created for the benefit of the original plan owner’s children upon the surviving spouse’s death. That measure would protect the interests of both the surviving spouse and the deceased plan owner’s children in the retirement plan. So far, so good.

Under the original SECURE Act of 2019, the marital sub-trust, drafted as a conduit trust, would allow the surviving spouse to start taking RMDs the year after the deceased spouse would have turned 73. (Conduit trusts are designed to pay out all distributions to beneficiaries, who then pay income taxes on those distributions). RMDs would be calculated based on the surviving spouse’s life expectancy under the IRS Single Life Expectancy Table (SLT), with life expectancy recalculated annually (and each year’s RMD adjusted accordingly).

However, under SECURE 2.0, there is a slight change to the rules for calculating an RMD where there is a marital sub-trust—and that small change could make a big difference.

How SECURE 2.0 Changes the Calculation

Beginning in 2024, under SECURE 2.0, the surviving spouse in the scenario above can elect to use the IRS’s Uniform Lifetime Table (ULT), still beginning to take distributions the year after the deceased spouse would have turned 73. The surviving spouse’s life expectancy is still recalculated annually to determine the RMD, now using the ULT instead of the SLT.

The question then becomes, “What’s the difference between using the ULT and the SLT?” And the answer can be, “A lot.” Let’s take a look at an example.

Mary, the surviving spouse of Arthur, has inherited Arthur’s retirement plan with an IRA balance of $400,000 through a marital sub-trust. She can begin taking RMDs from the trust at age 72.

• Under the SLT, Mary’s life expectancy factor is 17.2 years.
• Under the ULT, Mary’s life expectancy factor is 27.4 years.

That seems like quite a difference. Here’s how it breaks down in terms of annual RMD, which is calculated by dividing the IRA balance by the life expectancy factor:

• Using the SLT, $400,000/17.2 = $23,255.81 annually ($1,937.98 monthly)
• Using the ULT, $400,000/27.4 = $14,598.54 annually ($1216.54 monthly)

As you can see, using the Uniform Lifetime Table to calculate RMD yields a much lower annual distribution than the Single Life Expectancy Table. So the effect that SECURE 2.0 has on marital sub-trusts is to enable surviving spouses to take a smaller RMD than previously, with the likely effect of leaving more funds in the retirement account for the original account owner’s surviving children or other designated beneficiaries.

Why would a surviving spouse want to take a smaller RMD? There are a number of potential reasons. The biggest one is that the surviving spouse has enough other income that they do not need the RMD to meet their living expenses. Minimizing the amount of the RMD they must take would reduce the amount of their annual income, and probably reduce the amount of income tax owed. Another potential reason for a surviving spouse to reduce the amount of their RMD has to do with Medicare payments. Surviving spouses whose payments for Medicare are based on their annual income might well want to reduce the amount of that income, and by so doing, the amount of their Medicare payments.

The Bottom Line

SECURE 2.0 may give you options you didn’t have before with regard to an inherited retirement account, but those options may not be immediately obvious without the guidance of an experienced tax professional. To learn more, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.