A Brief Overview - The 2020 Secure Act 10-year rule for Inherited IRAs
In recent years, legislation has led to changes in retirement planning rules. Effective January 1, 2020, the Secure Act changed the rules on inherited IRAs. One of the most notable changes was introducing the 10-year rule for designated beneficiaries.
Understanding what the rule means and how it affects beneficiaries can help you understand retirement planning impacts it could have if you will inherit an IRA and yours.
The 10-year rule was introduced by the SECURE Act and governs how designated beneficiaries must liquidate an inherited IRA. Initially the rule was simple. Designated beneficiaries were required to withdraw all the money from the inherited IRA by December 31 of the 10th year following the IRA holder’s death. During this 10-year period, beneficiaries could withdraw any amount of money from the account at any time without any annual required minimum distributions (RMDs). However, any money remaining in the account at the end of the 10-year period would be considered a missed RMD and subject to penalty.
Beneficiary Types
Rules governing inherited IRAs apply differently depending on the type of beneficiary.
Eligible Designated Beneficiaries (EDBs)
EDBs are individuals who can still implement the stretch IRA strategy and can fall into any of these five categories:
- Surviving spouse
- Disabled individual
- Chronically ill individual
- Any other individual not more than 10 years younger than the deceased IRA owner
- Minor child of the IRA holder under age 21 (can stretch until age 21, then the 10-year rule applies)
Designated beneficiaries and the 10-year rule
The 10-year rule applies to the group of people now known as designated beneficiaries, defined as any individuals who don’t qualify as EDBs. The group of beneficiaries most impacted by the 10-year rule are adult children inheriting an IRA from their parents.
IRS regulations that have been applied to the SECURE Act have created an additional layer of requirements for designated beneficiaries. Most notably, some designated beneficiaries are now required to take annual RMDs in addition to also being subject to the 10-year rule.
How a designated beneficiary is required to withdraw the money from an inherited IRA now depends upon when the IRA holder passed away relative to their required beginning date (RBD) — the date on which the first RMD is due from the IRA holder. For all IRA holders, the RBD is the same. It is April 1 the year after the IRA holder turns 73 (previously age 70 ½ prior to the SECURE Act and Age 72 prior to SECURE 2.0, effective January 1, 2023).
1 - If the IRA holder dies before April 1 the year after turning 73 (their RBD), the 10-year rule applies as it was originally understood. There are not any annual RMDs, and the designated beneficiary must withdraw all the money from the inherited IRA by December 31 of the 10th year following the IRA holder’s death.
2 - If the IRA holder dies on or after their RBD, the designated beneficiary is subject to the 10-year rule and annual RMDs. The RMDs are calculated just as they were prior to the SECURE Act using the single life table. The RMD is based on the beneficiary’s life expectancy the year after the IRA holder passed away, subtracting one from the life expectancy factor each subsequent year.
