More Confusion for Surviving Spouses

Section 327 of the "Secure 2.0" Act passed in December adds one more option for surviving spouses for inheriting retirement plans. It can help or not.

Section 327 of the “Secure 2.0” Act passed in December adds another option for surviving spouses that inherit a retirement plan (not an IRA). Before we discuss the new option, let’s review the old options.

Spousal Rollover. The first option is that the surviving spouse could elect to rollover the plan assets into their own IRA. The survivor becomes owner of those assets and will begin to take distributions once they reach their required beginning date (RBD) (currently age 73 and will be 75 beginning in 2033). This may or may not be the best option.

Delayed Spousal Rollover. Under this option, the survivor leaves the plan assets under the “name” of the deceased spouse and becomes the designated beneficiary until the deceased spouse would hit their RBD. Right before this RBD is achieved, the surviving spouse rolls the plan assets into their IRA.

This creates flexibility to allow the surviving spouse to take a distribution out of the plan since it would not be subject to the 10% excise tax if they are before age 59 1/2. If they had rolled it into their IRA, the excise tax would apply. Here is an example:

Jim, a farmer passes at age 63 in 2024. His spouse, Trudy, is age 73. If Trudy rolled the retirement plan assets into her IRA, she would be required to start minimum distributions immediately. However, she can elect to remain as a beneficiary and as Jim’s age (as if still alive) approaches age 75 (the new RBD in 2033), she can roll over the assets into her IRA and start taking distributions.

Conduit Trust. If the surviving spouse is the sole beneficiary of trust created by the deceased spouse and this trust is named as the beneficiary of the plan, then the trust is now subject to the SECURE Act’s 10-year distribution rule.

New Section 327 Rule. SECURE 2.0 now requires the surviving spouse to make an election to benefit from the delayed RBD. If the election is made the spouse is allowed to use the more beneficial Uniform Lifetime Table instead of the less beneficial Single Life Table (i.e. you are allowed to take smaller distributions each year). The benefits of making the election are as follows:

• RMDs for the surviving spouse would be delayed until the deceased spouse would have hit their RBD if alive (this can be many years).

• Once the RMD of the decedent would be required, the surviving spouse will calculate their RMDs based on the Uniform Lifetime Table which will require smaller distributions (likely about 10% smaller in most cases). However, remember that if the spouse rolls the plan over to their IRA, they are still allowed to use this better table.

• If the surviving spouse passes before RMDs begin, the surviving spouse heirs will be treated as the original beneficiaries of the plan and thus any eligible designated beneficiaries will be allowed to stretch over their lifetime instead of forcing distributions within 10 years.

This new Section sounds like a good idea; however, it requires the surviving spouse to make an appropriate election and it is not necessarily a simple yes/no decision. This can be a difficult time for a surviving spouse and care must be taken to make the right decision.