Retirement Account Traps for the Unwary - Deadlines to Be Aware of After the Death of the Account Owner
For many individuals, a qualified retirement account, such as a 401K, 403B, IRA, or the like, can be the single largest asset they own at death. In most instances, the owner has designated a beneficiary or beneficiaries to receive the account upon their death. The rules surrounding retirement accounts can get complicated very quickly and what rules apply depend on several variables.
The first question to ask is whether the owner died before satisfying their required minimum distribution (RMD) for the year. For tax deferred accounts, meaning accounts other than Roth accounts, annual RMDs must be distributed upon attaining a statutorily defined age. This is known as the required beginning date (RBD). The RBD has been changed several times in recent years. For some it is 70 ½, for others 72 or 73, and for some it will be 75. If the account owner dies before receiving their full RMD for the year, the beneficiary must take the remaining RMD prior to December 31 of the year of death. Failure to timely take the RMD results in an excess accumulation penalty. Proposed regulations allow the penalty to be waived if the RMD is taken prior to the tax return due date, including extensions.
Another important deadline to remember with retirement accounts is September 30 of the year following the year the account holder died. This is the deadline for determining who the beneficiary of the qualified account is and how the qualified account will be distributed. For example, if the account holder died in 2023, then September 30, 2024 is the deadline to determine who the beneficiaries are and how the account will be distributed.
Following enactment of the SECURE Act in 2020, there are now three classifications of beneficiaries: (1) eligible designated beneficiary, (2) designated beneficiary, and (3) non-designated beneficiary. Which classification the beneficiary falls in will determined the timing of required distributions. The required timing of distributions can get vary nuanced and you should consult with a professional soon after the death of the account owner to review your situation.
If the retirement account has more than one beneficiary, it is important that all non-designated beneficiaries be removed prior to the September 30 deadline. This is done by either having the non-designated receive their full share prior to that date or properly disclaim their portion of the assets. If a non-designated beneficiary has not taken one of those actions prior to the September 30 deadline, all beneficiaries will be treated as non-designated beneficiaries and subject to the shortest distribution period known as the 5-year rule. This means the entire account must be emptied by the end of the 5th year following the year of death.
One last deadline to remember, if a trust has been named as the beneficiary, a copy of the trust must be provided to the custodian by October 31 of the year following the year of death.
The bottom line is that dealing with retirement accounts after the death of an owner is a nuanced and tricky business. Trying to go it alone could land you and others in a much worse tax situation. If the estate you are administering includes a retirement account, make sure you are getting with a qualified professional soon after the individual’s death to determine the steps that need to be taken in your situation to ensure the best results.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.