The SECURE Act of 2019 ushered in significant changes for IRA beneficiaries and the regulations surrounding required minimum distributions (RMDs). In July 2024, the IRS unveiled final regulations concerning RMDs, affirming the majority of the proposals put forth in February 2022. Among the most noteworthy—and perhaps unexpected—updates is the introduction of the "10-Year Rule." Established by Congress, this rule aims to enhance revenue by reducing the timeframe for many beneficiaries to access their IRA funds. Ultimately, the new regulation reduces the pool of eligible beneficiaries who can receive distributions throughout their lifetimes. This shift brings with it the need for a fresh perspective on IRA management and planning for the future!
Fewer Eligible for a Stretch IRA
When an IRA owner died before 2020, most beneficiaries could take distributions over their own life expectancy, allowing younger beneficiaries to stretch their RMDs over 40 years, 50 years, or even more. The SECURE Act limited the number of beneficiaries who could enjoy this option. The aim was to increase federal tax revenue and reduce the accumulation of dynastic wealth by using the "stretch IRA." Starting with IRA owners who died in 2020, only certain beneficiaries can enjoy this stretch IRA option. These “eligible designated beneficiaries,” or EDBs, include
- Spouse beneficiaries,
- Nonspouse beneficiaries who are not more than 10 years younger than the IRA owner,
- Disabled or chronically ill beneficiaries,
- Minor children of the IRA owner, and
- Certain see-through trusts.
Most EDBs will use the life expectancy method of distributing IRA assets. Still, sometimes they can elect the 10-Year Rule (even if it is seldom chosen). This simple chart shows when the 10-Year Rule may apply.
| Beneficiary Type | Death Before RBD (or Roth) | Death On or After RBD |
| Eligible Designated Beneficiary (EDB) | The 10-Year Rule may be elected | Life expectancy payments |
| Non-EDB (e.g., adult children or grandchildren) | 10-Year Rule required | 10-Year Rule required (along with annual RMDs) |
| Nonperson Beneficiary (e.g., estate, charity) |
5-Year rule in effect | Annual RMDs (based on decedent’s life expectancy) |
Keep two concepts in mind: First, beneficiaries may always distribute more than required, including taking a lump sum. Second, trust beneficiaries may have more complicated options, depending on several factors. Trustees of such beneficiaries should seek sound advice when determining what payout methods to use.
The Required Beginning Date Dictates the Distribution Method
The required beginning date, or RBD, is the date by which Traditional (and SIMPLE) IRA owners must take their first RMD, generally by April 1 of the year following the year they turn 73. (Previously, this age was 70½ and 72 and will become 75 in 2033.) This date determines whether beneficiaries must continue this payment stream once the IRA owner dies, and it is particularly important when the 10-Year Rule applies.
Referring to the chart above, you can see that a non-EDBs must apply the 10-Year Rule when the IRA owner dies. But here is the important difference: if the IRA owner dies before the required beginning date, the 10-Year Rule only requires the depletion of the IRA balance by the end of the tenth year following the death. However, if the IRA owner dies after the RBD, the account must not only be depleted by the end of the tenth year, but the beneficiary must also take annual distributions based (typically) on the beneficiary's single life expectancy.
Example: The IRA owner dies in 2025 at age 67 (well before her RBD). Her son, age 41, is the non-eligible designated beneficiary. In this case, the son must deplete the IRA by December 31, 2035, with no annual distribution requirement. But if the IRA owner died at 77 (after her RBD), the son would have to take annual distributions based on his life expectancy, while also depleting the IRA by December 31, 2035.
The 10-Year Rule is Here to Stay
The introduction of the 10-Year Rule in the SECURE Act, applicable to deaths occurring in 2020 and beyond, sparked considerable interest and discussion. With the introduction of new Required Minimum Distribution (RMD) regulations, which necessitate annual distributions alongside the 10-Year Rule in specific circumstances, adaptation became essential. The IRS's stipulation that certain beneficiaries must make annual distributions during the initial nine years of this decade-long period is rooted in existing RMD statutes, marking a notable shift for many in the retirement planning sector. However, the recently issued final RMD regulations confirm that the 10-Year Rule is a lasting component of retirement planning. It is crucial for both beneficiaries and retirement professionals to embrace this evolution.
Note: There is a silver lining during this adjustment period. Because the annual distribution requirement was such a departure from previous rules, the IRS has granted some relief for beneficiaries subject to annual payments during the 10-year period. For 2021 through 2024, the IRS will not enforce the excess accumulation penalty for those who missed their annual distributions under the 10-Year Rule.
Resources
Understanding the 10-Year Rule and its impact on IRA planning can be complex, especially with the recent regulatory updates. Whether you're a current beneficiary or an IRA owner reviewing your beneficiary designations, it's important to stay informed. For more intricate situations—such as trust beneficiaries or timing around the required beginning date—professional tax or legal advice may be necessary. Visit STRATA's Self-Directed IRA Knowledge Center to learn more about IRA Beneficiary Designations.
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