Retirement accounts are often some of the largest assets families own. But what happens to an IRA after the owner dies can be just as important as how much is in the account.

A newer rule under the SECURE 2.0 Act gives surviving spouses another option. In the right situation, it may allow a spouse to take smaller required distributions from an inherited retirement account while still allowing the deceased spouse to control where the remaining money ultimately goes.

This can be especially helpful when an IRA is left to a trust for a surviving spouse rather than directly to the spouse.

Why This Matters

Traditionally, a surviving spouse who inherits an IRA has had some important choices.

The spouse can often roll the IRA into his or her own IRA. This provides favorable tax treatment and allows the spouse to name new beneficiaries. But it also gives the surviving spouse control over where the remaining IRA goes at death.

Another option is to leave the IRA as an inherited IRA. That can sometimes be helpful, particularly for a younger surviving spouse who may need access to the money before age 59½.

There is also a third planning approach: naming a properly designed trust for the spouse as beneficiary of the IRA.

One type is called a conduit trust. In simple terms, retirement account distributions received by the trust must generally be passed along to the surviving spouse. The advantage is that the person who created the estate plan can still control who receives whatever remains after the surviving spouse dies.

That can be important in second marriages, blended families, or other situations where someone wants to provide for a spouse but also protect an inheritance for children or other beneficiaries.

SECURE 2.0 added another potentially valuable choice.

Under Section 327, a surviving spouse who remains a beneficiary may elect to have required minimum distributions calculated as though the spouse were the owner of the retirement account.

Why does that matter?

It can mean smaller required distributions.

For example, at age 75, the difference could be roughly 4.1% of the IRA balance instead of about 6.8% under the regular inherited-account calculation described in the rule.

That difference can be significant over time. Less money being forced out of the IRA means more money can potentially remain invested and continue growing tax-deferred.

It may also make a trust for a surviving spouse more attractive in situations where the IRA owner wants to accomplish two goals at the same time:

Take care of the surviving spouse while also controlling where the remaining retirement assets go after the spouse dies.

There are still some unanswered questions about exactly how this election works when a trust is the IRA beneficiary, including whether the surviving spouse or the trustee has authority to make the election in certain situations. Future IRS guidance may provide more clarity.

That is an important reminder that retirement account planning is not simply about naming a beneficiary. The beneficiary designation, the estate plan, the tax rules, and the terms of the trust all need to work together.

Simple Lesson

The best beneficiary choice is not always the simplest one.

For married couples with significant retirement accounts, thoughtful planning may provide for a surviving spouse while also protecting the family’s long-term inheritance.

Action Step

Take a look at the beneficiary designations on your IRAs, 401(k)s, and other retirement accounts.

If your estate plan names a trust as a retirement account beneficiary—or if you want to provide for your spouse while preserving assets for children—it may be worth reviewing the plan under the newer SECURE 2.0 rules.

If you’d like help reviewing your plan, call (517) 548-7400 or connect with us here: https://www.michiganestateplans.com/contact-us