The SECURE Act’s 10 Year Rule (Part 1)

A recent caller asked me to confirm a change he said he read about relating to required minimum distributions from an inherited IRA.  I wasn’t sure exactly what he was referring to so I did a little digging.  Before I tell you what I found, probably a little background on the topic is helpful.

I last wrote about the SECURE Act in a post on February 5, 2023, specifically about changes to the original SECURE Act.  The original act passed in December, 2019.  It raised the age at which one must start withdrawing funds from an IRA – known as required minimum distributions or RMDs, from 70 and 1/2 to 72.  This was viewed favorably.  SECURE Act 2.0, passed in 2023 then raised the RMD to 73 beginning in 2023.  It will also gradually be raised to 75 by 2033.

However, when the government gives us something good on the one hand, it typically takes away something else – often of greater value.  In this case, it essentially eliminated the stretch IRA for most everyone except a surviving spouse and certain disabled and minor beneficiaries (although even these beneficiaries only get a limited reprieve).

What Congress took away was a big deal.  Before SECURE Act, if I inherited an IRA from my parent I could ”stretch” the time frame over which I had to withdraw funds from this account over my life expectancy, thus allowing the account to grow tax deferred for a longer period of time and delay my payment of tax.  Being younger than my parent by 25 to 30 years or more, this could be quite beneficial.

As I said, the SECURE Act did away with the Stretch provisions for just about everyone.  In its place Congress imposed a 10 year rule, however, as with most tax laws, not everything is set forth clearly.  It is then left to the IRS to issue rulings and clarifications.  That’s where it gets more complicated.  I’ll get to that next week.