New Ten Year Rule
Just when we all think our retirement is all figured out, the IRS has to throw us a curveball.
When the SECURE Act was created in 2019, we were introduced to the new 10-year rule which changed the way that some beneficiaries could access the funds in inherited IRAs.
Let’s get into the changes and what they might mean for you.
What is an RMD?
A Required Minimum Distribution or RMD is calculated by taking the total account values of IRAs and some employer plans on December 31 of the prior year and dividing by a life expectancy factor. This factor is based on the number of years left in the owner’s life. This dollar amount is then required to be withdrawn and tax paid on it. It’s the IRS’s way of forcing people to pay tax.
Pre-2020 Rule
The original rule allowed those who inherited an IRA to “stretch the IRA.” This means that anyone who was not the spouse of the deceased had to take RMDs annually over their life, not the life of the owner. Spouses were not subject to RMDs until they reached 70.5 years old. The life expectancy factor of say a child or even grandchild would be much longer and the amount they have to take out, in the beginning, would be much less than if they were older.
With the new rules, spouses who inherit an IRA can still take the RMD over their lifetime. However, non-spousal beneficiaries such as children and grandchildren must not only take an RMD but must also withdraw all of the funds within 10 years of the original policyholder’s passing. This created a whole new planning need as having to withdraw larger RMDs over 10 years could drastically impact someone’s tax bracket.
With the new rule it was thought that beneficiaries could simply wait until the 10th year to withdraw the total amount. However, the IRS issued a ruling on March 25, 2021 stating that non-spouse beneficiaries are subject to RMDs between the 1st and 9th years, before taking the larger lump sum in the 10th year.
Post-2020 Rule
There are a number of groups exempt from the changes who follow the original stretch IRA rules. This includes:
spouses
minor children - but they must begin the 10-year rule at the age of majority
disabled or chronically ill beneficiaries
those who are no more than 10 years younger than the original policyholder. This is a unique one and would exempt maybe siblings and friends who inherit but not adult children, etc.
Many of us have planned for our children, spouses and other family members to be protected in the event of our passing. But this new ruling changes things for some beneficiaries. To talk through your changes with a financial planner, get in touch with me here to schedule a call.