New Law Changes Payout Timeframe for IRA Beneficiaries

Published

October 12, 2020

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The SECURE Act ends the stretch IRA. Under the now “old rules” (before 2020), an individual designated beneficiary could extend post-death “stretch IRA” required minimum distributions over his lifetime. A young grandchild might have a 70-year payout period. But no more. The SECURE Act eliminates the stretch IRA and replaces it with a 10-year payout for most beneficiaries.

The people most affected are those with large IRAs who had planned on leaving the majority share of those accounts to their children and grandchildren with payouts extending over their lives. This notably includes any clients who named a trust as their IRA beneficiary. Estate plans naming a trust as their beneficiary need to be readdressed immediately.

1. Are current stretch IRAs for those who died before 2020 still good? Yes, they are grandfathered, but only until the beneficiary dies, so payouts to the successor beneficiary (the beneficiary’s beneficiary) will be limited to 10 years.

2. Does this eliminate stretch IRAs for all beneficiaries? No. The law carves out exemptions for certain beneficiaries now called eligible designated beneficiaries, or EDBs. Eligible designated beneficiaries are: • Surviving spouses. • Minor children, up to majority – but not grandchildren. • Disabled individuals – under the strict IRS rules. • Chronically ill individuals. • Individuals not more than 10 years younger than the IRA owner (generally, siblings around the same age).

The old stretch rules still apply to these beneficiaries, the same as before, but only while the beneficiaries still qualify as EDBs. 

3. Do grandchildren qualify as minors for the EDB exemption? No. The law is clear on this. The EDB exemption from the 10-year rule is only for the child of the IRA owner or plan participant.

Example: An IRA owner dies in 2020 and leave her IRA to her grandchild. The grandchild, no matter what age, will be subject to the 10-year payout after death, unless that grandchild qualifies as disabled or chronically ill. It’s likely that a trust was named for that grandchild. That trust too, is subject to the 10-year rule. That’s probably not what the client wanted. The reason she named a trust was to protect those funds for the grandchild. Certain trusts may still do this but they would all still be limited to a 10-year payout.

4. How do the Required Minimum Distributions (RMDs) work under the 10-year rule? Are there RMDs during the 10 years? No. Under the 10-year rule, there are no RMDs during the 10 years. Instead, the entire IRA balance must be emptied by the end of the 10 years. Beneficiaries can withdraw any amounts they wish over the 10 years, so beneficiaries do have some planning flexibility during the 10 years to withdraw funds when it best fits their tax situation during that time.

5. Do Roth IRAs still qualify for the stretch? No. Inherited Roth IRAs are subject to the same 10-year payout rule, except that the distributions will generally be tax-free. Converting to a Roth IRA may eliminate what could be a big tax bill within 10 years after death. For more information on IRAs and retirement planning, visit Retirement Central on our website. Merck representatives are not tax advisors. For more information regarding your specific tax situation, please consult a tax professional.

2020. Merck Employees Federal Credit Union. 

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