The SECURE Act overhauled the rules for beneficiaries of retirement accounts. One significant change it brought is the new 10-year payout rule. Here are ten things you need to know about the new 10-year rule.
1. The 10-year rule applies to most nonspouse beneficiaries when the account owner dies in 2020 or later. The bottom line with the SECURE Act is that very few nonspouse beneficiaries will escape the 10-year rule. While the new law does carve out some exceptions such as disabled or chronically ill individuals, most beneficiaries who used to be able to stretch out distributions over their lifetime will end up with the 10-year rule.
2. Spouse beneficiaries are not subject to the 10-year rule. Many people name a spouse as the beneficiary of their retirement account. Spouse beneficiaries escape the 10-year rule and can continue to use the stretch.
3. The account must be emptied by December 31 of the tenth year following the year of death. We expect the 10-year rule to work like the old 5-year rule with an end-of-year deadline.
4. The 10-year rule applies to successor beneficiaries. The rules have changed for successor beneficiaries. They must empty the account within ten years instead of continuing the stretch over the original beneficiary’s life expectancy.
5. There are no annual RMDs during the ten years. Nothing needs to be taken out of the inherited account until the end of the tenth year following the year of death.
6. Minor children will ultimately be subject to the 10-year rule. While minor children of the account owner can get the stretch, this won’t last forever. Once they reach the age of majority under state law or finish school (but no later than age 26), the 10-year rule will kick in.
7. Most trusts will be subject to the 10-year rule. Most trusts, like other nonspouse beneficiaries, will be subject to the 10-year rule.
8. Grandchildren who are retirement account beneficiaries will mostly be subject to the 10-year rule. Under the old rules, many retirement account owners would name a grandchild as an IRA beneficiary to get the maximum stretch. This will not work anymore. Unless a grandchild is chronically ill or disabled, the 10-year rule will apply.
9. Roth IRA beneficiaries are also subject to the 10-year rule. The SECURE Act requires Roth IRA beneficiaries to use the same set of rules as traditional IRA beneficiaries, resulting in the 10-year rule applying to most Roth IRA beneficiaries.
10. Failure to comply with the 10-year rule results in a big penalty. If a beneficiary does not empty the account by the end of the tenth year following the year of death, there is a serious penalty. A 50% penalty will apply to any amount not taken from the inherited account.