Three Senior Women with Cameras in Garden

Strategic Planning for the SECURE Act's 10-Year Rule

One of the major changes under the SECURE Act is the elimination of the “stretch” distribution strategy for inherited IRAs and retirement plans. If an IRA owner or retirement plan participant passes away in 2020 or after and leaves the assets to a non-spouse beneficiary, the non-spouse beneficiary must generally have the inherited account fully distributed by December 31 of the 10th anniversary of death and may have RMDs throughout the 10 years (known as the 10-year rule). This rule change impacts all IRAs (including Roth IRAs) and Qualified Retirement Plans.

Prior to 2020, non-spouse beneficiaries had the option of “stretching” that inherited account over their life expectancy by taking minimum distributions each year. This “stretch strategy” maximized the amount of time those assets could stay in a tax-deferred account and minimized taxation each year. Here’s an example of how long beneficiaries could potentially stretch distributions prior to 2020:

IRS Life Expectancy Factor (from single life table)

Age of Beneficiary

Life Expectancy

Source: Internal Revenue Service, Publication 590-b, Distributions from Individual Retirement Arrangements (IRAs).  30 53.3
40 45.7
50 36.2
60 27.1

As you can see, the 10-year rule (instead of life expectancy) significantly speeds up the inherited asset payout and thus typically makes the assets taxable for the beneficiary sooner. The taxable income over the 10-year period may also bump beneficiaries into higher tax brackets. While the 10-year payout impacts most beneficiaries, there are a few exceptions:
  • Spouses
  • Minor children of the IRA or retirement plan account owner
  • Disabled or chronically ill individuals
  • Non-spouses who are no more than 10 years younger than the deceased
These beneficiaries may generally still take minimum distributions each year over their life expectancy. For minor children, they may stretch the inherited account over their life expectancy until they reach the age of majority in their state. At that point, the 10-year rule will apply.

With such an impactful change on how inherited IRAs are paid out, let’s examine some potential planning strategies that you may be able to implement to minimize taxes for you and your beneficiaries:

Leave the Assets to a Spouse

Spouse beneficiaries may still take distributions over their life expectancy.
Review Trust Language If Designated as Beneficiary

The original intention of the trust may not be able to be accomplished due to the new 10-year payout requirement.
Expand the Number of Beneficiaries You Have

This could spread the IRA income to more heirs and therefore create less of a tax impact for certain beneficiaries.
Consider Naming a Charitable Remainder Trust (CRT) as Beneficiary

The IRA may be transferred tax-free to a CRT upon death, and heirs will receive payments from the CRT per the terms of the trust, which can be longer than 10 years.
Leave Pre-Tax Assets to Beneficiaries in Low Tax Brackets and Roth Assets to Beneficiaries in Higher Tax Brackets

This may only be appropriate in certain situations where the beneficiaries can agree on how to pay the taxes due or if there are non-IRA assets to cover the tax liability.
Utilize Qualified Charitable Distributions (QCDs)

If charitably inclined, giving more pre-tax IRA money to charity while living may allow you to direct other after-tax assets to heirs.
Consider Beneficiaries Who Are Less Than 10 Years Younger Than You

Since these beneficiaries can still stretch distributions over their life expectancy.
Implement Strategic Roth Conversions

This may be recommended if the beneficiary is in a higher tax bracket than the IRA owner, since inherited Roth distributions will be tax-free for the beneficiary.
Consider Eliminating Younger Beneficiaries

Since younger beneficiaries no longer get to stretch the inherited account over their life expectancy, designating them to receive these assets may be less desirable.
Take IRA Distributions to Pay for Life Insurance

If structured properly, life insurance can provide a tax-free death benefit to heirs.

If the account owner has already passed away, here are some planning considerations for the beneficiary:

Strategize Your 10 Years for Pre-Tax Assets

Consider taking minimum or no distributions (if no RMD) in high income years and significant distributions in low income years.
Maximize Your 10 Years for Roth Assets

Consider taking no distributions in years one through nine and a full distribution in year 10 to optimize the compounding growth of tax-free earnings.

While these planning strategies may be appropriate in certain situations, it is important to review any tax or estate planning matters with a CPA and/or an estate attorney.

Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.