10-Year Rule: Beneficiary Planning “Loophole” Closed

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

With the passage of the SECURE Act, once common IRA beneficiary planning strategies have been upended. For example, no longer can just anyone stretch payments on an inherited IRA. You must qualify as an “eligible designated beneficiary” (EDB) to stretch using your single life expectancy. As we have written many times, EDBs include surviving spouses, minor children of the account owner (up to majority, or if still in school, up to age 26), disabled and chronically ill individuals, and individuals not more than 10 years younger than the IRA owner.

All other living, breathing IRA beneficiaries will now use the 10-year rule. There are no annual required minimum distributions (RMDs) during the 10-year window, but the account must be emptied by the end of the tenth year after the year of death.

In light of these new beneficiary payout rules, it came as no surprise that people began thinking of ways to leverage them for maximum benefit. Can I structure a payout this way? What if I do this? Some ideas were creative, some destined to fail. Occasionally, an idea was imaginative enough that it demanded debate as to its legitimacy.

For example, based on a creative inquiry, I wrote a Slott Report entry in May 2020 called “Does Membership Have its Privileges? Spouse Beneficiaries and the 10-Year Payout.” In that blog I discussed a beneficiary planning idea (loophole?) that was not clearly addressed in the SECURE Act. The premise was for a spouse beneficiary to elect the 10-year rule in order to stop RMDs on inherited dollars. If the deceased original owner had been taking RMDs, the spouse (also of RMD age) could potentially choose the new 10-year option created by the SECURE Act as opposed to doing a spousal rollover. If permitted, this would halt RMDs on those inherited dollars for a decade.

Alas, with the recent release of IRS Publication 590-B, “Distributions from Individual Retirement Arrangements,” this loophole appears to have been closed. For EDBs, including spouse beneficiaries, the payout options are predicated on whether the original IRA owner had reached his required beginning date (RBD) – April 1 of the year after turning of 72. The RBD determines when lifetime RMDs are to begin.

If RMDs were initiated to the original account owner (i.e., he died on or after his RBD), then the 10-year option is off the table for EDBs. Spouse beneficiaries can either do a spousal rollover or keep the account as an inherited IRA. Non-spouse EDBs can only stretch payments based on life expectancy.

Note that the elimination of the 10-year rule after the original IRA owner reaches his RBD is applicable to EDBs only. All other living, breathing IRA beneficiaries who are not EDBs can still use the 10-year rule. (In fact, the 10-year rule is the only option for non-EDBs.)

Despite all the acronyms included above, this scenario is now clear. As soon as we receive guidance on other SECURE Act uncertainty, we will pass it along.