A key difference the Secure Act brought in was eliminating the stretch IRA (for the most part) and placing a 10-year limit on IRA withdrawals for beneficiaries. For those who died in 2019 or before, their DBs would be eligible for a stretch IRA, while the beneficiaries of those who died afterward would not.
There are exceptions. For example, an eligible designated beneficiary is defined as a surviving spouse or minor child (but not grandchild), or a person with special needs or a chronic illness. EDBs are eligible for the stretch IRA.
Here are examples Slott provided on post-death payout DBs.
- The most common example: The IRA owner dies in 2020 and leaves the IRA to his son, age 32 — a designated beneficiary. The son has 10 years to empty the IRA after the owner’s death.
- Let’s say the IRA owner dies in 2020 and leaves it to his adult son, Jerry, who is injured in a car crash and becomes disabled. Because he wasn’t an EDB when the father died, Jerry is still obliged to adhere to the 10-year rule.
- Minor children, however, can be designated EDBs temporarily or until they reach the age of majority: age 18, or 26 if they stay in school. That means they will be able to stretch IRA withdrawals until they turn 18 or 26, and then have 10 years afterward to empty the account. So let’s say the IRA owner dies in 2020 and leaves the IRA to her 10-year-old daughter. She is an EDB until she hits 18 (or 26 if she stays in school) and must convert to the 10-year rule after that.
- What about IRAs left to two children, one an adult and one a minor? The 10-year rule applies to the adult; the minor is considered an EDB and can use the stretch until they become an adult, and then it converts to the 10-year rule.
- As noted, those heirs who are chronically ill or disabled are eligible for the stretch.
- Also as noted, heirs of IRA owners who died in 2019 or before are grandfathered in to the stretch rule. However, DBs of IRA owners who die in 2020 must follow the 10-year rule.
- A successor beneficiary generally gets the 10-year rule. For example, if an IRA owner dies in 2019 but their DB daughter dies in 2020, the daughter’s DB is subject to the 10-year rule.
- If an IRA owner and their DB both died in 2019, the successor is grandfathered into the stretch rule.
- If an EDB inherits in 2020, they get the stretch, but once they die, their successor is subject to the 10-year rule.
Slott reiterated that it is “still critically important” to have a designated beneficiary now, even though most are subject to the 10-year rule.
In the end, “the 10-year payout rule is not the worst rule in the world,” he told the audience.
What he’s seen is that “most young beneficiaries are a smash and grab … they have the money out before the body’s cold. Now, with the 10-year rule, they might let it play out.”