Choice of Life Expectancy Stretch or 10-year Stretch?

Submitted by Paul McGillivray on Tue, 2020-06-09 13:53

Our client died this year, 2020, and his beneficiary is his 79-year-old mother. Does Mom have a choice of using either the 10-year distribution requirement or the life-expectancy Stretch? With Mom having a 2021 Life Expectancy factor from the new Table 1 of 11.2, it seems like the Life Expectancy Stretch might help Mom’s beneficiary in that they could take their ultimate distribution using Mom’s Life Expectancy. What do you think? Is there a choice and can the next beneficiary keep the Stretch going? Thanks much. Paul McGillivray



Submitted by Alan - IRA critic on Tue, 2020-06-09 14:14

  • Mom is subject to the 10 year rule.
  • The former IRS Regs allowed the use of the decedent’s remaining LE if longer than that of the beneficiary, but only if decedent passed after the RBD. In this case, decedent obviously passed prior to his RBD, so this option is off the table even if the IRS extends the former Reg as a Secure Act option.
  • Even if Mom could have used her own LE of 11.2, arguably the small difference between that and the 10 year rule is probably offset by the flexibility of when distributions can be taken under the 10 year rule, since there is no set requirement until the final year when the account must be drained.

Submitted by David Mertz on Tue, 2020-06-09 16:33

Wouldn’t Mom be an eligible designated beneficiary because she is not more than 10-years younger than the decedent, permitting LE stretch to be an option?  Granted, stretching over 11.2 years probably doesn’t provide much, if any, benefit over the 10-year rule.  However, being able to use LE stretch as an EDB would also mean that a successor beneficiary would be subject to the 10-year rule based on Mom’s date of death.

Submitted by Alan - IRA critic on Tue, 2020-06-09 20:56

  • Yes, good catch. An actual parent beneficiary of a child would always be an EDB, so she would apply the 11.2 initial divisor for 2021 should the new tables be adopted. Have not heard any more regarding adoption status for the proposed new tables. Whether adopted or not, upon Mom’s passing her beneficiary would become subject to a new 10 year rule.
  •  Now if client left the account to a child of the client, the 10 year rule would apply for the non EDB child, and even if the child then passed, the IRA would still have to drained by the end of the child’s 10 years. Therefore, the longest this IRA could last if left to this child is 10 years after the year of death. It is interesting that leaving the IRA to EDB Mom and then to Mom’s beneficiary for a new 10 years would usually result in a longer total life for the inherited IRA than leaving it to a much younger non EDB child or other non EDB beneficiary. 

Submitted by Paul McGillivray on Wed, 2020-06-10 12:01

I agree that in this case the difference between the Life Expectancy factor 11.2 and the 10-year rule is not much making the 10-year rule the obvious choice–for the sake of flexibility if nothing else.  Is there any risk that the IRS would force the application of the Life Expectancy distribution path over the 10-year Rule?  Can the beneficiary choose their option in a case like this?   Thank you for your help with this.    

Submitted by Alan - IRA critic on Wed, 2020-06-10 14:07

Note the correction posted by DMx and my subsequent post. Since she is an EDB, the 10 year rule does not apply, and she would use the single life expectancy table (whether the IRS adopts new tables for 2021 or not). She does not have the choice to use the 10 year rule, but beneficiary’s own successor beneficiary will probably fare better this way since they will get an additional 10 years when Mom passes. In summary, Mom will start with the 11.2 divisor in 2021 if new tables are adopted, and if she passes before draining the inherited IRA, her beneficiary will receive an additional 10 years from there, albeit with a much lower balance if Mom lives out most of the 11.2 years.

Submitted by David Mertz on Wed, 2020-06-10 14:34

It’s not clear to me that she would not have the option to use the 10-year rule even though she is an EDB since the IRS permitted the 5-year rule to be elected by non-spouse beneficiaries prior to the SECURE Act if the decedent died before RBD.  I don’t think that the IRS has issued any guidance on this yet.  Still, it’s often better to drain an inherited traditional IRA over time rather than delaying, allowing the move to investments that could be taxable at long-term capital gains rates instead of as ordinary income and would receive a step-up in basis upon Mom’s death.  If the inherited IRA is a Roth IRA, delaying distributions to keep the money growing tax free would generally be the better choice.

Submitted by Paul McGillivray on Wed, 2020-06-10 15:17

thanks much. 

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