The SECURE Act’s 10 Year Rule (Part 2)
In last week’s post, I wrote about the SECURE Act, specifically the change that for most beneficiaries does away with the ability to stretch out the time period by which funds must be withdrawn from these accounts. This change will affect most children who inherit retirement accounts from their parents. Being 25 to 30 years or more younger than their parents, before the SECURE Act they could stretch out the time period by which they must withdraw tax deferred funds and pay the tax. This limited the tax hit and allowed these accounts to grow for a longer period of time without paying tax.
The 10 year rule changed that by requiring that these funds be withdrawn completely by the 10th year. What was not entirely clear was whether a beneficiary must withdraw a minimum amount each year or simply make sure to withdraw it all by the end of the 10th year after the original account holder’s death. When the tax law is not clear, the IRS steps in to issue clarification.
The IRS last month clarified this issue and announced how it plans to apply the 10 year rule. As with most IRA rules, the answer is complicated. That’s because different rules apply when the deceased owner dies after reaching required minimum distribution (RMD) age vs. someone who died before reaching their RMD age.
If the deceased owner dies after reaching RMD age, the beneficiary must take withdrawals at least as rapidly as the deceased owner had been and must withdraw any balance left by the end of the 10th year. On the other hand, if the owner dies before reaching RMD age, then the beneficiary must simply withdraw the entire balance by the end of year 10. There is no annual withdrawal requirement.
One final decision the IRS made is to suspend this withdrawal requirement until 2025, as it had suspended it each year since the passage of SECURE Act until it could resolve the issue. So the next question most people will ask is, “what is the best option”? That depends on each individual’s current and future income tax situation. What is right for one person may be different for another. It’s best to consult with your income tax professional to find the right fit for you.