Take-Away: Once required minimum distributions are ‘turned on’ they cannot be later ‘turned off’ by a successor beneficiary of a retirement account.

Background: For several years now we have covered, often in depth,  the topic of required minimum distributions (RMDs) of designated beneficiaries of retirement accounts, and more recently the unique distribution rules that are associated with eligible designated beneficiaries of retirement accounts. Sometimes mentioned, but seemingly more like an afterthought, is a successor beneficiary who inherits from a designated beneficiary or an eligible designated beneficiary of the retirement account. A successor beneficiary is simply the beneficiary of another beneficiary.

Successor Beneficiaries: A successor beneficiary is bound by the SECURE Act’s 10-year distribution rule, no matter that beneficiary’s relationship to the previous account owner, or that beneficiary’s physical condition. Accordingly, it does not matter if the successor beneficiary is a spouse, or the successor beneficiary is disabled or could qualify as an eligible designated beneficiary who would otherwise be able to stretch required minimum distributions.

General Rule: If the original beneficiary of the retirement account was using or subject to the SECURE Act’s 10-year distribution rule, the successor beneficiary can only continue whatever time remains on that existing 10-year distribution period. This is because of the Tax Code’s at least as rapidly rule. [IRC 401(a)(9)(B)((i) and (ii).] If the original beneficiary was stretching distributions from the inherited retirement account over his/her own single life expectancy, the successor beneficiary will continue that same distribution pattern, but the successor beneficiary will also then overlay the SECURE Act’s 10-year distribution rule. 

Once ‘Turned On’ the RMDs Cannot be “Turned Off:’ In other words, if the required minimum distributions were ‘turned on’ at any point prior to the successor beneficiary acquiring the retirement account, those RMDs cannot be ‘turned off.’

Example: Willa, age 56, died in 2020. Willa named her daughter Barbara, age 30, as the beneficiary of Willa’s traditional IRA. On the date of Willa’s death, Barbara qualified as chronically ill, and thus Barbara met the definition of an eligible designated beneficiary, or EDB, able to stretch RMDs using her own life expectancy. Consequently, under the SECURE Act, Barbara began taking annual stretch required minimum distributions (RMDs) based on Barbara’s own Single Life Expectancy. Barbara then died in 2028. Barbara named her son Bud as the primary beneficiary of the inherited (from Willa) IRA. Bud is the successor beneficiary of that IRA. Bud must receive (or empty) the remaining IRA balance no later than the end of the 10th year following Barbara’s death (December 31, 2038.) Despite the fact that Willa had not yet started taking RMDs from her own IRA, Barbara ‘turned on’ the required minimum distributions by starting to take RMDs using her own life expectancy, as an eligible designated beneficiary. In sum, the at least as rapidly rule mandates that Bud cannot ‘turn off’ the RMDs that his mother Barbara started. Bud must take RMDs for years 1-9 within the 10-year period based on Barbara’s RMD distribution schedule. That would be the case even if Bud qualified as an eligible designated beneficiary by virtue of his own disability or chronic illness.

Conclusion: The Tax Code’s at least as rapidly rule has caused a lot of confusion when it is applied to distributions from inherited retirement accounts. That rule determines the frequency (not the amount) of required minimum distributions. That rule applies to successor beneficiaries as well as designated beneficiaries of the retirement account.