The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act has many aspects that are beneficial to your clients in terms of retirement planning and related areas. One area that may benefit some clients is changes in the rules for surviving spouses who inherit retirement accounts from their deceased spouses. This aspect of the legislation can offer planning benefits for some of your clients when these changes commence in 2024.
Surviving Spouse Beneficiaries
The rules in place prior to Secure 2.0 have long been favorable to those inheriting IRAs and other retirement accounts from their spouse. They were exempt from the limitations on the stretch IRA on most non-spousal beneficiaries arising from the original Secure Act rules that went into effect in 2020.
Surviving spouses have several options, including keeping the account as an inherited IRA and taking distributions over their lifetime, using the five-year rule or treating the IRA as their own.
New Rules Under Secure 2.0
Under Secure 2.0, the surviving spouse can elect to be treated in the same fashion as the deceased spouse. This choice, which becomes available in 2024, allows for some additional options in addition to those currently available:
- Required minimum distributions for the surviving spouse will be delayed until the deceased spouse would have reached the age at which RMDs would have commenced had they lived — age 73 or 75, depending upon their birth year.
- Once the RMDs for the decedent would need to commence, they would be calculated using the IRS Uniform Lifetime Table versus the Single Life Expectancy Table that is currently required for the surviving spouse and other beneficiaries. The Uniform Lifetime Table will result in a lower RMD calculation.
- If the surviving spouse dies before RMDs begin on the deceased spouse's IRA, then the surviving spouse's beneficiaries would be treated as if they were the original beneficiaries of the original account holder. This would allow any of these beneficiaries who could be classified as eligible designated beneficiaries under the original Secure Act to stretch distributions over their life expectancy versus having to take distributions under the 10-year rule.
Younger Spouse Dies First
It looks like a major benefit of the new rules for surviving spouses will occur when the surviving spouse is older than the deceased spouse. Like many of the provisions of Secure 2.0, there are details that need to be sorted out and that will need additional clarification, but initial interpretations suggest this change could be beneficial for your clients.
Under this scenario, the older surviving spouse could wait until the deceased spouse would have reached the age where they were required to begin their RMDs. This would allow them to let the assets in the deceased spouse's IRA continue to grow tax-deferred.
Here is an example of how this might work: Your clients are a married couple, Mary, age 56, and Henry, age 61 as of Jan. 1, 2024. Mary dies on Jan. 27, 2024. Mary's RMDs would have commenced in 2042 — the year she would have turned 75 had she lived.
If Henry keeps Mary's IRA as a separate account and the balance grows to $2 million by 2042, the first-year RMD would be $2 million divided by 22.9, or $87,336 using the Uniform Table. The RMD using the smaller factor in the Single Life table for age 75 would be $135,135. This is a difference of $47,799.
If Henry doesn't need the money from Mary's RMDs to fund his own retirement, he can let the money grow inside her IRA.
Here is a hypothetical look at the five years of RMDs of Mary's account if taken under the Uniform table or the Single Life table.
| Mary's age if she had survived | Account Balance for RMD | RMD – Uniform Lifetime Table | RMD – Single Life Table | Difference |
| 75 | $2.0 million | $87,336 | $135,135 | -$47,799 |
| 76 | $2.1 million | $95,455 | $148,936 | -$53,481 |
| 77 | $2.3 million | $108,491 | $172,932 | -$64,441 |
| 78 | $2.4 million | $118,227 | $190,476 | -$72,249 |
| 79 | $2.3 million | $117,949 | $193,277 | -$75,328 |
| Total | $527,458 | $840,756 | -$313,298 |
While these numbers are hypothetical, they illustrate the advantage of being able to use the Uniform Lifetime Table versus the Single Life Expectancy Table for calculating the RMDs. Under the current rules, Henry might have taken Mary's IRA account as his own. The RMD amounts might have differed a bit, but the advantage of being able to use the Uniform Lifetime Table for the RMDs from Mary's IRA would still be very real.
For clients who find themselves in this situation, the advantages can be significant. Delaying the RMDs on the younger deceased spouse's IRA can allow the IRA account to grow tax-deferred over time. This can add up to significant additional assets for the surviving spouse in the years between the account owner's death and the date when RMDs must begin, depending upon the account owner's age at death.
