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How the New 10 Year Rule Might Impact your Inherited IRA Thumbnail

How the New 10 Year Rule Might Impact your Inherited IRA

While many of our clients may be familiar with the new rules around their first required IRA distribution (now up to age 73 from the erstwhile 70 ½), fewer are likely to have heard that Congress didn’t just change the rules for the living. In particular, the new “10-Year Rule” in the SECURE Act of 2019 significantly changes to required withdrawals from Inherited IRAs as well. 

What is the 10-Year Rule? 

When someone inherits an IRA from a deceased person, they often wonder how to handle distributions. The 10-Year Rule mandates that, for most non-spouse beneficiaries, the entirety of the inherited IRA must be distributed by the end of the 10th year following the account owner's death. 

This means that, unlike the previous rules, beneficiaries no longer have the option to "stretch" IRA distributions over their life expectancy. Instead, they have flexibility in the timing of the distributions within the ten-year timeframe, but the account balance must be zeroed out by the end of that period. 

Who is Affected? 

Importantly, this rule does not apply to all beneficiaries. Exceptions include the following Eligible Designated Beneficiaries (EDBs): 

  • A surviving spouse 
  • Minor children of the deceased account owner 
  • Disabled individuals & chronically ill persons 
  • Beneficiaries not more than ten years younger than the decedent 

If someone falls into any of these EDB categories, they are still allowed to take distributions over their life expectancy. 

Why Does this Matter?

One word – taxes. With potentially larger distributions taken within a decade instead of over a lifetime, there's a higher likelihood of beneficiaries being pushed into a higher tax bracket. Therefore, it's vital to strategically plan the distributions to minimize the tax impact. 

What Should You Do? 

  1. Re-Evaluate Beneficiaries: Ensure that your IRAs have the correct beneficiaries listed, especially if your intentions were based on the old "stretch" IRA rules. 
  2. Plan Distributions: Work with a financial advisor to determine the optimal timing for distributions to manage the tax implications. 
  3. Consider Conversions: Some may benefit from converting traditional IRAs to Roth IRAs, thereby paying taxes upfront and allowing beneficiaries to inherit a Roth IRA with tax-free withdrawals.

Ultimately, while the 10-Year Rule clearly simplifies the distribution process of inherited IRAs, it also presents some unique planning challenges. So whether you are planning for your future beneficiaries or if you have an Inherited IRA of your own, please remember we are always here to assist in making sure your financial plan and financial future are sound and secure. 

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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten