SECURE Act’s 10-Year Rule Brings New Planning Opportunities

By now, most IRA owners have heard the bad news. The SECURE Act eliminates the stretch IRA for the majority of beneficiaries who inherit in 2020 or later. Instead, for most, a 10-year payout rule will apply. Here is how this new rule works and how, for some beneficiaries, there may be new planning opportunities available.

How It Works

This new 10-year rule works like the old 5-year rule worked. There are no annual RMDs. Instead, the entire account must be emptied by the 10th year after the year of death. In the 10th year following the year of death, any funds remaining in the inherited IRA would then become the required minimum distribution (RMD). If the funds are not taken by the deadline, a 50% penalty would be owed.

The Opportunities

While many IRA owners will miss the stretch IRA, for some, the 10-year rule may be beneficial. Even when the stretch IRA was available, not all beneficiaries used it. Not every beneficiary was interested in keeping an inherited IRA open for years and years. Some beneficiaries want the money faster. For them, the 10-year rule is a good fit.

Those beneficiaries that did take advantage of the stretch were locked into a rigid annual RMD schedule. The annual RMD had to be taken regardless of the beneficiary’s tax situation or there would be a 50% penalty. There were no other options.

What the new 10-year rule offers is flexibility. During the 10-year period, the beneficiary may choose to take nothing during a particular year or large distributions in others, as long as the account balance is emptied by the end of the 10-year term. This provides a tax planning opportunity. Distributions can be structured in such a way as to minimize the tax hit. There are no restrictions as long as the account is emptied by the end of the tenth year following the year of death.

The 10-year rule also provides a big opportunity for Roth IRA beneficiaries. Distributions from inherited Roth IRAs are almost always tax-free. A beneficiary could take no distribution until the tenth year, leaving all the earnings in the inherited Roth IRA to grow tax-free. The account could then be emptied in the tenth year after years of tax-free growth with no tax bill for the beneficiary.

Good Advice is Essential

Maybe you inherited an IRA in 2020 and are concerned about the 10-year rule. Or, maybe you are considering your estate plan and are thinking about how your beneficiaries will fare under the new rules. Now is a good time to consult with a knowledgeable tax advisor or you can call me. While the stretch IRA will be missed, the SECURE Act 10-year rule allows for new planning opportunities for those willing to think outside the box.

I am an Ed Slott Master Elite trained IRA Specialist and I would like to help you. If you have any questions regarding this article or would like to schedule a complimentary consultation please call my office at 845-627-8300. My Client Service Coordinator Christina will be happy to set up a convenient time so I can help. 

Follow Beth Blecker on Twitter: @EasternPlanning

_{“Ed Slott’s Elite IRA Advisor Group” is solely an indication that the financial advisor has attended training provided by Ed Slott and Company. Ed Slott is not affiliated with Royal Alliance Associates, Inc. Securities and advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC. Additional advisory and financial planning offered through Affiliated Advisors, Inc. Insurance services offered through Eastern Planning Inc. Listed entities not affiliated with Royal Alliance. Reprinted from The Slott Report, 6/10/2020, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Copyright © 2019 Ed Slott and Company, LLC.}