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F I N A N C I A L P L A N N I N G

In addition, the SECURE

Act created a new designated

beneficiary category named

“eligible designated benefi-

ciary” (EDB). EDBs continue

to get the stretch IRA.

Extended Effective Dates

The effective date for the elimination of the stretch IRA

and the new 10-year rule generally applies to deaths after

December 31, 2019. That effective date is extended for two

years (for deaths after December 31, 2021) for governmen-

tal plans, including 403(b) and 457(b) plans, and the Thrift

Savings Plan (TSP). It is also extended for as long as two

years for collectively bargained plans, depending on the

expiration date of the union contract.

Retirement Accounts Affected

The elimination of the stretch IRA and the new 10-year

rule provisions apply to defined-contribution plans,

including 401(k), 403(b) and 457(b) plans, and traditional

and Roth IRAs. The new rule does not apply to defined-

benefit plans (e.g., pensions).

Kinds of Retirement Plan Beneciaries

Under the SECURE Act, there are now three kinds of

retirement plan beneficiaries for determining post-death

payouts after 2019:

1. Non-designated beneficiary (NDB)

2. Non-eligible designated beneficiary (NEDB)

3. Eligible designated beneficiary (EDB)

Eligible Designated Beneciary: Stretch Still

Applies

EDBs are a new category of beneficiaries created under

the SECURE Act. The SECURE Act exempts these benefi-

ciaries from the 10-year rule. EDBs must be designated

beneficiaries (they still must be named on the retirement

account beneficiary form).

There are five classes of eligible designated beneficiaries:

» Surviving spouses;

» Minor children, up to majority age, or if still in

school, up to age 26—but not grandchildren;

» Disabled individuals—under the strict IRS rules;

» Chronically ill individuals; and

» Individuals not more than 10 years younger than the

IRA owner.

Plus, any designated beneficiary (including qualifying

trusts) who inherited before 2020 is grandfathered under

the pre-2020 stretch IRA rules. In addition, trusts for the

sole benefit of these EDBs should qualify as an EDB.

Update Your Estate

Plan for Your IRAs

Most non-spouse beneciaries of retirement

accounts are subject to the SECURE Act’s

10-year withdrawal rule, but not all.

BY ED SLOTT, CPA

Don’t be fooled by the name Congress gave to the

law that ended the stretch IRA for most retirement

account beneficiaries. Even though the law is named the

“SECURE Act,” the true effect is the opposite.

The SECURE Act completely upended decades of estab-

lished tax law that families relied on for passing their indi-

vidual retirement accounts (IRAs) and other retirement

accounts to their beneficiaries using the so-called “stretch

IRA.” Most non-spouse beneficiaries will now have to with-

draw their inherited retirement funds within 10 years after

death. Bunching that income into a shorter time period

will likely result in an overall higher tax bill.

What Is (or Was) the Stretch IRA?

The stretch IRA is a simple concept. It is the ability of

the named beneficiary to spread (or stretch) required post-

death distributions over the beneficiary’s life expectancy.

This allowed beneficiaries to extend their required mini-

mum distributions (RMDs) over decades in some cases,

spreading the tax bill over all those years.

Designated Beneciaries

Individuals named on the beneficiary form and qualify-

ing see-through trusts are “designated beneficiaries.” Any

designated beneficiary who inherited before 2020 still gets

to continue the stretch IRA.

Ed Slott, CPA, named “America’s IRA

Expert” by Mutual Funds Magazine, is a

nationally recognized speaker, television

personality and author. Find out more at

www.aaii.com/authors/ed-slott.

Slott is speaking at AAII’s virtual Investor

Conference this fall; go to https://www.aaii.com/

investorconference for details on purchasing video

recordings.

O C T O B E R I S :

Financial

Planning

Month

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EDBs are unaffected by the new rules. But once they no

longer qualify as EDBs, or when they die, the 10-year rule

is applied for them or for their beneficiaries.

How the 10-Year Rule Works

For most non-spouse beneficiaries, the ability to stretch

RMDs from an inherited IRA will be replaced with a 10-year

rule. There are no annual RMDs, but the entire inherited

account balance must be emptied by the end of the 10th

year after the IRA owner’s death. However, even though

there is no longer a stretch IRA available for these bene-

ficiaries, there is a tax planning benefit with the 10-year

rule. During the 10-year period, there is flexibility, so pay-

ments during the 10 years can be taken according to what

is best taxwise for each beneficiary. That can help benefi-

ciaries plan out their withdrawals during the 10 years. The

beneficiary may choose to take nothing during a particu-

lar year or take large distributions in others, as long as the

account balance is emptied by the end of the 10-year term.

In the 10th year following the year of death, any funds

remaining in the inherited IRA would then become the

RMD. If these funds are not taken by the deadline, a 50%

penalty would be owed.

Lifetime Beneciary Planning

The beneficiary can be changed at any time during the

lifetime of the IRA owner and, in some cases, even after

death (through disclaimers or death of a beneficiary). Life-

time distributions do not depend on the existence or iden-

tity of the beneficiary except in limited cases. However,

every retirement account should still have a designated

beneficiary and a contingent beneficiary in place at all

times. Failure to have a designated beneficiary in place at

death could result in the loss of the extended payout, that

is, the stretch IRA, for beneficiaries who will still qualify

for the stretch IRA under the SECURE Act.

Failure to have a designated beneficiary can also result

in the loss of the new 10-year post-death payout option for

deaths in 2020 or later. In addition, the SECURE Act may

require a new look at beneficiary planning.

Older Beneciaries Can Use the Longest Life

Here is an unusual and not well-known rule that can

benefit a beneficiary who is older than you, like a sibling,

partner or friend. If the IRA owner dies after their required

beginning date (i.e., the date RMDs must begin, which

is now April 1 after their age 72 year) and the designated

There are the three kinds of retirement plan beneficiaries

for determining payouts for deaths occurring after 2019 for

defined-contribution plans, including 401(k), 403(b) and 457(b)

plans, and traditional and Roth IRAs.

1. Non-Designated Beneficiary (NDB)

NDBs include estates, charities or non-qualifying trusts

(non-look-through trust); they are not people. No change to the

post-death payout rules for NDBs was made by the SECURE Act.

If the account owner dies before their required beginning

date (RBD) to start taking distributions, the account must be

withdrawn by the beneficiary by the end of the fifth year after

death—the five-year rule. There are no annual required mini-

mum distributions (RMDs) during the five-year window. (The

RBD is generally April 1 after the year of the 72nd birthday.)

If the owner dies on or after their RBD, the beneficiary must

take RMDs over the deceased IRA owner’s (or plan participant’s)

remaining single life expectancy. (Note: This can produce a

post-death payout exceeding 10 years. However, RMDs must

be taken in each of those years.)

2. Non-Eligible Designated Beneficiary (NEDB)

These are all designated beneficiaries who do not qualify as

EDBs (see #3). Examples include grandchildren, older children

and some look-through trusts. The new 10-year rule applies

to NEDBs.

The post-death payout rules for NEDBs include no stretch

IRA for deaths after 2019, no annual RMDs are required and

the entire account must be emptied by the end of the 10th year

after death.

3. Eligible Designated Beneficiary (EDB)

EDBs are a new category of beneficiaries created under the

SECURE Act. EDBs must be designated beneficiaries but are

exempt from the 10-year rule. In other words, the stretch IRA

rules still apply.

There are five classes of EDBs: Surviving spouses; minor

children of the account owner—up to majority, or up to age

26 if still in school—but not grandchildren; disabled individu-

als (under the strict IRS rules); chronically ill individuals; and

individuals not more than 10 years younger than the IRA owner.

Any designated beneficiary (including qualifying trusts) who

inherited before 2020 are grandfathered under the pre-2020

stretch IRA rules. In addition, trusts for the sole benefit of these

EDBs should qualify as an EDB.

EDB status is determined at the date of the IRA owner’s (or

plan participant’s) death and cannot be changed.

Once an EDB no longer qualifies as an EDB, or when they

die, the 10-year rule is applied for them, or for their beneficiaries

(i.e., successor beneficiaries).

Retirement Plan Payouts to Beneciaries Under the SECURE Act

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inherited IRA RMDs stop. Joann dies two years later at age

62 and leaves the IRA to her son Jeffery, age 30. Jeffery is

not an EDB, so the SECURE Act requires a 10-year term to

pay out the IRA. Jeffery must deplete the account by the

end of the 10th year following his mother’s death.

Temporary Stretch for Minor Children

A minor child of the IRA owner (but not a grandchild)

who qualifies under the SECURE Act as an EDB can stretch

IRA payments until the age of majority (age 18 in most

states) or up to age 26 if still in school. At that point, the

10-year term payout will kick in.

Example 4: Two children inherit in 2020, one is a minor and

one is not

Kristy dies on April 30, 2020, and leaves her IRA to

her two daughters—Alexa, age 18, and Zoey, age 14. Since

Alexa is of majority age and is no longer in school, she is

bound by the 10-year payout rule. She will have no annual

beneficiary is older than them, the beneficiary can use the

deceased IRA owner’s remaining single life expectancy

rather than the beneficiary’s life expectancy. This will give

the beneficiary a longer life expectancy for distributions

than they would have had if they had to use their own life

expectancy.

New Stretch IRA and Beneciary Payout

Rules and Examples

Now that you have the basics down, use these simple

examples to see how the beneficiary payout rules will

work.

Designated Beneciary Is Not a Surviving

Spouse

Example 1: Non-EDB inherits in 2020

In 2020, Tom, age 32, inherits a Roth IRA from his

father. He is a designated beneficiary, but he is not an eli-

gible designated beneficiary. This means he is subject to

the 10-year rule. Tom can take as much or as little as he

desires out of the inherited Roth IRA each year during the

10-year period, but he must withdraw the entire Roth IRA

by December 31, 2030, or he will be subject to the 50% pen-

alty on the amount not taken.

Example 2: EDB inherits in 2020

In 2020, Lisa, age 10, inherits an IRA from her mother.

Lisa is a minor child so she qualifies as an eligible desig-

nated beneficiary and can stretch distributions over her

single life expectancy, based on the IRS Single Life Expec-

tancy Table. This goes on for eight years. Lisa’s 18th birth-

day is in 2028 and she is no longer in school. Because

Lisa has reached the age of majority, the 10-year rule now

applies. This means that Lisa must empty the inherited

IRA by December 31, 2038—by the end of the 10th year

after she reached the age of majority (which in her state

was age 18).

Surviving Spouse Is an Eligible Designated

Beneciary

Example 3: Spouse inherits in 2020

Jim and Joann are a married couple. Jim dies in 2020 at

age 75 (after his required beginning distribution date) and

leaves his IRA to Joann, age 57. Joann needs access to the

funds, so she elects to treat it as an inherited IRA. She will

have an RMD, but by choosing to handle the account as an

inherited IRA, she will be allowed to take additional distri-

butions while avoiding the 10% early withdrawal penalty.

As an EDB, Joann stretches the RMD payments over her

single life expectancy, recalculated each year. At age 60,

Joann does a spousal rollover of the inherited IRA and her

Single Life Expectancy Table for Inherited

IRAs

The IRS’ Single Life Expectancy Table will be used only

by designated beneficiaries who inherited before 2020, or by

eligible designated beneficiaries (EDBs) who inherit after 2019,

to calculate post-death required distributions. The beneficiary

uses the age attained in the year after the death of the account

owner to look up their life expectancy factor.

Beneficiaries who inherit and withdraw using the deceased

IRA owner’s remaining single life expectancy will also use this

table to look up the factor.

The single life table is never to be used by IRA owners or

plan participants to calculate lifetime required distributions.

The single life table is a recalculating table, but only a

spouse beneficiary who is the sole beneficiary can go back

to the table each year and recalculate life expectancy. A non-

spouse beneficiary cannot recalculate and would only use this

table once to compute the first year’s required distribution

for the inherited IRA. The life expectancy factor will then be

reduced by one for each succeeding year (known as term-

certain payout).

The table can be found on the IRS’ website at:

https://www.irs.gov/publications/p590b#en_US_2020_

publink1000231236.

As of publication, the 2022 table—which increases the

life expectancy by one to two years—was not yet avail-

able on the IRS’ website. It was published in the Federal

12/pdf/2020-24723.pdf.

Note: The Single Life Expectancy Table is not used for

beneficiaries who are subject to the 10-year payout rule under

the SECURE Act.

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RMDs, but her inherited IRA will need to be emptied by the

end of the 10th year after her mother’s death.

Zoey, on the other hand, is a minor. She can temporar-

ily stretch the inherited IRA based on her single life expec-

tancy (67.9 for a 15-year-old—her age in the year after

her mother’s death and reducing that factor by one year

for each year of the stretch). Zoey takes annual RMDs for

eight years, until she finishes her education on her 22nd

birthday in 2028. Zoey’s annual RMDs can then be stopped

since the 10-year payout term springs forward. However,

Zoey must empty the remaining account by the end of the

10th year after her 22nd birthday.

Payout for Chronically Ill or Disabled

Beneciaries (EDBs)

Those who are chronically ill or disabled as defined

under the tax code on the date of the IRA owner’s death

qualify as an eligible designated beneficiary and are per-

mitted to stretch inherited RMD payments over their life

expectancy.

Example 5: Chronically ill beneficiary inherits in 2020

Grandma Gertrude dies on July 4, 2020. She named

her grandson Gary, age 30, as her primary beneficiary. On

that date, Gary qualifies as “chronically ill” under the tax

code definition. Since Grandma Gertrude died in 2020,

the SECURE Act rules apply. Gary can stretch the RMD pay-

ments because he is an eligible designated beneficiary due

to his medical condition.

Gary uses the Single Life Expectancy Table for inher-

ited IRAs to determine his RMD factor (52.4 for a 31-year-

old—his age in the year after Grandma Gertrude’s death

and reducing that factor by one year for each year of the

stretch). Gary is required to take an annual RMD until the

account is depleted.

10-Year Rule for Those Not More Than 10 Years

Younger Than the IRA Owner

A non-spouse beneficiary who is not more than 10 years

younger than the deceased IRA owner is an EDB under the

SECURE Act and can use their own age to stretch inherited

IRA RMD payments.

Example 6: Sibling less than 10 years younger inherits in 2020

Three sisters are a tight group. Sandra is the eldest at

70, Sheri is 61 and Celeste is 59.

Sandra dies in 2020 and leaves an IRA to both of her

younger sisters. Since Sheri (61) is less than 10 years

younger than Sandra, she qualifies as an eligible desig-

nated beneficiary and can stretch RMD payments over her

single life expectancy (23.5 for a 62-year-old, her age in the

year after death and reducing that factor by one year for

each year of the stretch).

Younger sister Celeste is only 59. She is more than 10

years younger than Sandra. Therefore, she is not consid-

ered an EDB and is bound by the 10-year payout term.

Celeste’s inherited IRA must be emptied by the end of the

10th year following her older sister Sandra’s death. (Mean-

while, if she only takes the RMD, middle sister Sheri can

continue to stretch her inherited IRA RMD payments for

Why Having a Designated Beneciary Is

Important

IRAs should almost never pass through a will. If an IRA

passes through a will, there is no designated beneficiary, and

the IRA will be paid out according to the rules that apply when

there is no designated beneficiary.

Naming the estate as the beneficiary is the same as leav-

ing the IRA to pass through the will. When the IRA does pass

through the will, it will become a probate asset subject to

estate claims and probate costs.

Even though most designated non-spouse beneficiaries

will be subject to the 10-year payout rule after death, there

are still benefits to having a designated beneficiary by naming

that individual or qualifying trust as the beneficiary on the

beneficiary form.

Benefits of Naming an Individual or Qualifying Trust

as the Beneficiary

» To make sure that eligible designated beneficiaries

get the stretch, since EDBs must also be designated

beneficiaries.

» To avoid the five-year rule where death is before the

RBD (required beginning date of distributions after age

72). Note: Roth IRA owners are always deemed to have

died before the RBD regardless of what the age at death

is, since Roth IRAs have no lifetime required minimum

distributions (RMDs). Having a designated beneficiary

for Roth IRAs is essential to avoid this five-year rule.

» To still qualify as a see-through trust for beneficiaries.

» To have flexible post-death payments during the

10-year payout period as opposed to RMDs each

year (under deceased IRA owner’s remaining single

life expectancy). This can help manage other stealth

taxes (including higher Medicare premiums, a larger

percentage of Social Security benefits taxed, the loss

certain tax deductions or other benefits) during the

10-year term.

» To avoid probate, longer estate administration, legal

fees and contests. Naming direct beneficiaries on the

beneficiary form can avoid potential disinheritance

where an unintended beneficiary inherits through the

estate (through the will). Directly named beneficiaries

will be the ones who receive the funds.

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more than another decade beyond when younger sister

Celeste had to empty her account.)

Date of Death Determines EDB Status

Example 7: Non-EDB inherits in 2020, but becomes disabled in

a later year

John dies on August 1, 2020. He named his son Jerry,

age 30, as his primary beneficiary. Jerry is bound by the

SECURE Act, which dictates he must use the 10-year

payout for the inherited IRA. Jerry gets into a car accident

six months later. He is fully disabled under the tax code

rules, but still cannot stretch the inherited IRA over his life

expectancy. He cannot qualify as an EDB because he was

not disabled as of the date of his father’s death.

Non-Designated Beneciary Payout

Rules

While much attention has been focused on the fate

of designated beneficiaries under the SECURE Act and

the fact that they will mostly be subject to a 10-year

payout rule, there has not been as much attention paid

to non-designated beneficiaries. The SECURE Act leaves

the rules for non-designated beneficiaries (e.g., estate as

the beneficiary, non-qualifying trust, charity) completely

unchanged. These rules are generally less favorable, which

again is why you should always have a designated ben-

eficiary—an individual named on the retirement account

beneficiary form. See the SECURE Act Beneficiary Payout

box on page 8.

Successor Beneciary Payout Rules

The successor beneficiary is the original beneficiary’s

beneficiary. Successor beneficiaries of owners who die

after 2019 are also subject to the 10-year payout rule—even

if the first beneficiary was considered an eligible desig-

nated beneficiary and could use the stretch rule.

Example 8: IRA owner dies in 2019, and beneficiary dies in 2020

Ann dies on November 1, 2019. She named her daugh-

ter Bea, age 48 on the day of Ann’s death, as her primary

beneficiary. Even though Bea is not an eligible desig-

nated beneficiary under the SECURE Act, she gets to take

advantage of the stretch rules because Ann died in 2019.

Bea dies on January 1, 2020, with her grandchild CeCe as

beneficiary. CeCe must receive the remaining IRA by the

end of the 10th year following Bea’s death (December 31,

2030) because Cece is a successor beneficiary.

Example 9: Chronically ill beneficiary inherits in 2020, and

then dies in 2028

Grandma Gertrude dies on July 4, 2020. She named her

grandson Gary, age 30, as her primary beneficiary. On that

date, Gary qualifies as “chronically ill” under the tax code

definition, so he can begin taking stretch RMDs. Gary dies

in 2028 with his minor child Jay designated as the primary

beneficiary. Jay must receive the remaining IRA portion

by the end of the 10th year following his father’s death

because he is a successor beneficiary.

SECURE Act Rules for a Trust for

Disabled or Chronically Ill Beneciaries

While the SECURE Act will limit most non-spouse ben-

eficiaries to a 10-year payout, there are special rules for

trusts set up for disabled or chronically ill beneficiaries

that allow RMDs to be paid from the IRA to the trust using

the beneficiary’s life expectancy, per the IRS Single Life

Expectancy Table.

Conclusion

Based on these new RMD rules, which are already in

effect, you should review your current estate plan for your

retirement accounts and inform your beneficiaries how

their post-death payouts will work.

Most important though, update your beneficiary forms

for all your retirement accounts. That will be your estate

plan for these funds. ▪

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