The SECURE Act: New 10-Year IRA Distribution Rule Post-Death

Updated: Sep 3


Many of our clients have historically used the ability to use the "stretch IRA" in their estate planning in order to help minimize the negative tax impact of dying with significant IRA assets. The SECURE Act has eliminated the stretch IRA and replaced it with a 10-year payout rule.


There is some flexibility in the new law allowing a beneficiary to determine how and when to take the distributions as long as the IRA account is 100% distributed by the end of the 10th year. In other words, if you inherited IRA assets in 2019, you must make sure that the entire balance in the IRA has been distributed to you by December 31, 2030.


With limited exceptions, distributions from IRAs and qualified plans inherited on or after January 1, 2020 can no longer be stretched over a non-spouse beneficiary’s life expectancy. Instead, the entire balance of the account must be paid to the beneficiary before the end of the 10th year following the owner’s passing. The concept of RMDs no longer applies here, and a beneficiary can withdraw as much or as little as he or she desires up until the expiration of the 10-year period, at which time the entire balance must be paid out. The 10-year rule applies to conduit trusts as well.


An important exception exists for “Eligible Designated Beneficiaries,” where RMDs may still be paid over such beneficiaries’ lifetime based on his or her life expectancy. Eligible Designated Beneficiaries include:


  1. a surviving spouse;

  2. minor children of the original account owner;

  3. disabled individuals;[1]

  4. chronically ill individuals;[2] and

  5. individuals not more than 10 years younger than the original account owner.


In the case of a minor child beneficiary, RMD rules apply until the child reaches the age of majority, then the 10-year rule is triggered. The minor child exception does not apply to minor grandchildren or any other minor child who is not a child of the account owner.


Planning Considerations


  • Roth IRA Conversion. As a result of the new 10-year payout rule, adult children who inherit a traditional IRA will be forced to realize additional income within a condensed period of time, which will likely occur during their peak earning years and result in a much higher income tax liability. Unlike a traditional IRA, Roth IRAs do not have RMDs during the owner’s lifetime, so assets may continue to grow without income tax until the owner’s passing, and income tax does not apply to withdrawals by the owner and future beneficiaries (as long as the account has been opened for 5 years). A client may convert some or all of a traditional IRA to a Roth IRA, either all at once or over time, realizing taxable income in the year of conversion. For example, a client may target annual conversions in amounts sufficient to reach the top of his or her income tax bracket for that year. Although the amount converted is subject to income tax currently, the tax rate may be lower than in the future if the IRA owner is in a lower tax bracket than the future beneficiary, if he or she can make use of otherwise expiring deductions, or due to changes in the law. Accounting for substantial itemized deductions, like medical expenses incurred for long-term care facilities, can significantly increase the amount of a traditional IRA that may be converted to a Roth IRA without generating additional income taxes. In doing so, it is important to consider the effect that a Roth IRA conversion may have on income floors for Social Security benefits and the Medicare Income Related Monthly Adjustment Amount. From an estate tax perspective, a Roth IRA conversion may help families with larger net worths. While the latent income tax liability present in a traditional IRA is not deductible for estate tax purposes, eliminating that liability prior to passing via a Roth IRA conversion creates a similar outcome. Paying the income tax during life reduces the gross estate value for estate tax purposes.

  • Charitable Giving and Life Insurance Planning. It is clear that, under the SECURE Act, the overall tax burden for the original account holder’s heirs will increase. A client may consider leaving some or all of the IRA or qualified plan to charity, eliminating both income tax and estate tax concerns. The assets passing to charity can be replaced by life insurance held in an irrevocable life insurance trust (“ILIT”), which may be funded during the IRA owner’s lifetime using annual exclusion gifts. Life insurance owned by the ILIT can also provide liquidity at passing. A charitable remainder trust (“CRT”) is a more advanced variation of this strategy which can (somewhat) replicate the effect of a stretch IRA or conduit trust. CRTs are generally structured to distribute an annual amount to a beneficiary, either for a term of years or for life, and then pay the remaining trust assets to charity at the end of the term. The CRT itself is tax-exempt, and income is slowly passed out to the beneficiary each year, effectively deferring the tax liability. Since the CRT is tax-exempt, upon the account owner’s passing, a traditional IRA could be paid to (and grow within) a CRT without triggering an immediate income tax. The assets would then be paid to the trust beneficiary gradually over time (generally a minimum 5% annual payout is required), akin to the effect of a conduit trust. This strategy must be evaluated on a case by case basis, as the actuarial value of the charitable remainder interest must be at least 10% of the CRT’s value. As noted above, the assets passing to charity can be replaced by life insurance held in an ILIT, if desired.

  • Accumulation Trusts. Before the SECURE Act, conduit trusts were often utilized to pass RMDs to the primary trust beneficiary (based on the beneficiary’s life expectancy) while protecting the balance of the retirement plan from the beneficiary’s creditors, such as a divorcing spouse. The new 10-year rule reduces the effectiveness of the conduit trust because the entire retirement account will be paid out to the trust beneficiary and thus eventually subject to creditors. In lieu of a conduit trust, an “accumulation trust” may be considered. The retirement account must still be paid out within 10 years of the owner’s passing, but the distributions may be accumulated inside the trust and remain shielded from creditors rather than distributed outright to the beneficiary. The trustee, in the exercise of fiduciary discretion, can then make trust distributions to the beneficiary. The tradeoff may be a significantly higher tax bill; tax brackets for trusts are dramatically compressed such that an accumulation trust would pay tax at the highest marginal rate starting at $12,950 in income (for 2020), whereas a conduit trust beneficiary would pay tax at the highest marginal tax rate for income over $518,400 as a single filer or $622,050 as a married joint filer (for 2020). This tax liability could be partially or completely offset with life insurance.


[1] A disabled beneficiary is defined under Internal Revenue Code (“IRC”) §72(m)(7) as an individual who is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”


[2] A chronically ill beneficiary is defined under IRC §7702B(c)(2) as an “individual who has been certified by a licensed health care practitioner as: (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of 90 days due to a loss of functional capacity, (ii) having a level of disability similar to the level of disability described in (i), or (iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.”


This material is intended for informational purposes only and should not be construed as legal or tax advice. It is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.

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