Deferral Period Shorter for Non-Spouse Beneficiaries of Retirement Accounts (Dan Young Commentary)

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For many Arkansans, one of their largest assets is their IRA, 401(k) or 403(b) account. Besides allowing an account owner the ability to defer income, these accounts have traditionally allowed the owner’s non-spouse designated beneficiary to withdraw funds in the account over the designated beneficiary’s life expectancy. For example, if at the account owner’s death, the non-spouse designated beneficiary is 55 years of age, the beneficiary could withdraw the funds in the account over 29.6 years.

The recently enacted Setting Every Community Up for Retirement Enhancement Act of 2019 limits the deferral period for most non-spouse designated beneficiaries to 10 years. The exceptions to the 10-year rule for a non-spouse designated beneficiary are:

This is an Opinion

  • The child of the account owner who has not attained 21 years of age
  • A disabled beneficiary
  • A chronically ill beneficiary
  • A beneficiary who is not more than 10 years younger than the account owner.

For a minor child, the child may receive funds in the account over his life expectancy until attaining 21 years of age at which time the 10-year period begins.

Many account owners may want benefits for a child to remain in trust for the child after the time the child attains 21 years of age. An account owner may want this plan for a child who is in a high risk profession (medicine); does not have money management skills; has creditor issues; or is or may be subject to a child support order.

It is possible to structure a trust, which would accumulate the distributions from an IRA and distribute them for the child’s benefit pursuant to the terms of the trust. But the trustee must receive the funds in the IRA within 10 years of the account owner’s death.

Any retirement assets retained by the trustee (not distributed to the beneficiary) would likely be taxed at a federal rate of 40.8% (37% income tax plus 3.8% net investment income tax). As a comparison, in 2020 if the beneficiary is married, files a joint tax return, and has an adjusted taxable income of $150,000, the beneficiary’s federal marginal tax rate would be 22%.

In order to decrease the income tax liability to the beneficiary, an option for an account owner to consider before death is converting a portion of the IRA to a Roth IRA.

A Roth IRA differs from a traditional IRA in that 100% of the growth is tax-exempt, and there are no required minimum distributions during the account owner’s lifetime. After the account owner’s death, the required minimum distribution rules on a Roth IRA are identical to a traditional IRA, meaning in most situations, the funds would have to be withdrawn from the IRA within 10 years of the account owner’s death.

The “cost” of converting a portion of a traditional IRA to a Roth IRA is the account owner will recognize taxable income equal to the amount converted. Because the account owner is taxed on the conversion, distributions from the Roth IRA to the beneficiary are not subject to income tax.

The ideal individual to consider a Roth conversion is someone who has non-IRA funds from which to pay the tax liability and wants the funds to accumulate in a trust for the beneficiary. An individual should discuss whether to make a partial Roth conversation with her accountant.

This limitation on the deferral period applies to accounts for account owners who die after Dec. 31, 2019. Therefore, if a designated beneficiary is currently receiving funds in the account over her life expectancy, this new rule does not apply to her.

Dan Young is a member of Rose Law Firm and represents high net worth individuals and families with respect to complex tax, estate planning and trust and estate administration matters. He also regularly represents fiduciaries and beneficiaries involved in trust or estate litigation and other disputes. You can contact him at