Mixed IRA Beneficiary types and the 5-year rule
I have a client who would like to have a charity or two as primary beneficiaries on her Traditional IRA, along with her adult children also as primary beneficiaries. Reading IRS Publication 590-b (for tax year 2020, on page 11), it appears the 5-year rule for emptying an IRA after death may apply – instead of the 10-year rule – if you mix individuals and non-individuals as beneficiaries. Under the heading “Beneficiary not an individual”, part of what it says it the 5-year rule applies “where any beneficiary isn’t an individual”. Does this mean the 10-year rule wouldn’t be available to the adult children and they would have to empty their Inherited IRA in just 5 years? If so, would it be better for the client to split her IRA into two separate accounts, with the adult children as beneficiaries on one account and charitable organizations on the other account?
Permalink Submitted by Alan - IRA critic on Thu, 2021-09-02 23:42
The IRS has not yet published complete Secure Act Regs, and the Act itself does not address mixed multi beneficiary issues. The IRS will have to interpret the Secure Act intent and issue the detailed Regs.
The current beneficiary format is OK providing that all charities are paid off by 9/30 of the year following the year of client’s death (the beneficiary determination date). If there is any slip up, then the 5 year rule applies for deaths prior to RBD, and the client’s remaining LE if client passes after the RBD. Actually, the consequences are not as severe as prior to Secure, since the individuals have already been cut back to 10 years by the Secure Act. In some cases, the remaining LE of client could be longer than 10 years if client passes in the first few years after age 72. Pending revised IRS Regs, this is my expectation of how this would turn out.
In the meantime, I would still advise the client to partition the IRA into two accounts, one for the children and the other for the charities. That would assure that the children will get at least 10 years to drain their share. If any child is a disabled EDB who would not be subject to the 10 year rule, a further IRA split would be advisable since the Secure Act has only been clear about EDBs in a multi beneficiary IRA when a multi beneficiary trust is the beneficiary.