New 10-Year Rule Applies to Most Beneficiaries
By Alexis González-del-Valle, CIP, CHSP
What is the new 10-year rule for beneficiary distributions?
The 10-year rule is a new beneficiary distribution option—some might call it a restriction—provided by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of the Further Consolidated Appropriations Act, 2020 (FCAA), enacted in December 2019. For many nonspouse beneficiaries this will require that the entire balance of their inherited IRAs be distributed within 10 years of the account owner’s death.
Who is subject to the new 10-year rule?
Designated beneficiaries (i.e., individuals) who are not “eligible designated beneficiaries,” are subject to the 10-year rule. An “eligible designated beneficiary” is
the account owner’s surviving spouse;
the account owner’s child who has not reached the age of majority at the time of the account owner’s death (once the child has reached the age of majority, the child will have to distribute the entire balance of the inherited IRA within 10 years. As of this writing, the age of majority for this purpose had not been positively determined, though an IRS website posting referenced age 18.);
disabled (the individual’s impairment is expected to be of long, continued, and indefinite duration, or to result in death, as determined by a physician);
chronically ill (the individual is (1) unable to perform without substantial assistance from another person at least two activities of daily living for at least 90 days due to a loss of functional capacity, (2) has a level of disability similar to a level of disability described previously, or (3) requires substantial supervision in order to protect the individual from threats of health and safety due to severe cognitive impairment.); or
an individual not more than 10 years younger than the account owner.
With the exception of the five-year rule, an eligible designated beneficiary can use the beneficiary rules that existed before the SECURE Act was passed. In addition, an eligible designated beneficiary has the option to elect the 10-year rule, if preferred, over life expectancy payments.
Is it still important to know whether a Traditional or SIMPLE IRA owner died before, or on or after the required beginning date for the purpose of determining beneficiary options?
If the beneficiary is an eligible designated beneficiary or a nondesignated beneficiary (an entity such as an estate or charity), it is still important to determine if the Traditional or SIMPLE IRA owner died before, or on or after the required beginning date (RBD). The payout options for these beneficiaries are based on the beneficiary options that existed before enactment of the SECURE Act, and the options available to these beneficiaries are determined based on whether the Traditional or SIMPLE IRA owner died before, or on or after the RBD. The RBD is either
April 1 of the year following the year that the IRA owner attained age 70½ (if the IRA owner was born before July 1, 1949) or
April 1 of the year following the year that the IRA owner attained age 72 (if the IRA owner was born on or after July 1, 1949).
For those beneficiaries who are subject to—or elect—the 10-year rule, whether the Traditional or SIMPLE IRA owner died before, or on or after the RBD is irrelevant.
We have an IRA owner who died on January 5, 2020, at age 50. He had named his mother, age 80, as the beneficiary of his Traditional IRA. Would his mother be subject to the 10-year rule?
His mother would be considered an eligible designated beneficiary because she is not more than 10 years younger than the IRA owner. As a result, she can elect life expectancy or the 10-year rule.
What are the payout options if a nondesignated beneficiary (such as an estate,) is named as an IRA beneficiary? Is the 10-year rule an option?
If an entity such as an estate or charity is the beneficiary of a Traditional or SIMPLE IRA and the IRA owner died before the RBD, or an entity is the beneficiary of a Roth IRA, the beneficiary options are either the five-year rule or a lump-sum distribution. If an entity is the beneficiary of a Traditional or SIMPLE IRA and the IRA owner died on or after the RBD, the beneficiary options are to take a lump-sum distribution or single life expectancy payments based on the account owner’s life expectancy, nonrecalculated (starting in the year of death, reduced by one), begun by December 31 of the year following the year of death. An entity cannot elect the 10-year rule.
