Answered by Mike Valenti, Director, Tax Planning

Do stretch distribution rules still apply in addition to the new 10-year rule?

On July 18, 2024, the IRS published the long-awaited and much-anticipated final regulations on the SECURE Act’s provisions surrounding retirement accounts. The regs provided an answer to the burning question on everyone’s minds:

Yes, stretch distribution rules still apply in addition to the new 10-Year Rule.

Let’s back up. When the SECURE Act was passed in December 2019, a new rule requiring most beneficiaries inheriting retirement accounts to fully distribute the account within 10 years was implemented. This was generally understood to replace the “stretch” RMDs made to the beneficiaries over their lifetime. In early 2022, the IRS dropped a bomb in their proposed regs: the 10-Year Rule was not replacing the stretch RMDs but was instead added to the minimum distribution requirements.

The Categorization of Beneficiaries

Annual distributions would need to be made to the beneficiary and the account would need be fully distributed to the beneficiaries by the 10th anniversary of the original owner’s death. The misunderstanding is one issue; the other is that many people were not taking annual distributions from retirement accounts inherited after the SECURE Act.
Beneficiaries are now split into 3 groups:

1. Eligible designated beneficiaries – surviving spouses, disabled persons, minors, persons older than the decedent or less than 10 years younger
2. Non-eligible designated beneficiaries – most beneficiaries not named above
3. Non-designated beneficiaries – Charities, Estates, non-see-through trusts

Each group has their own set of rules, depending on whether the original account owner dies before or after their required beginning date.

Spouse vs. Non-Spouse Beneficiaries

Surviving spouses still can roll the decedent’s retirement account into an IRA of their own and take RMDs as they would normally. In this case, the account is no longer considered an inherited IRA and the new inherited IRA rules do not apply.

Most non-spouse beneficiaries will find themselves considered a non-eligible designated beneficiary. Adult children who inherited mom’s IRA, for example, would fall in this category. The new rules for this group are:

1. If the original owner dies before their required beginning date, the beneficiary has 10 years to fully distribute the inherited IRA.
2. If the owner dies after reaching their required beginning date, the beneficiary would be required to take the stretch distributions annually and fully distribute the account within 10 years of the owner’s death. Distributions are calculated using the beneficiary’s life expectancy factor from Single Life Table in the year after the original owner’s death. For each following year, you subtract 1 from the factor to calculate your annual RMD.

Some Good News

The IRS has waived the requirement for stretch RMDs (and related penalties) through 2024 for accounts whose owners died after 2019 will not be required until 2025. There is no adjustment to the 10-year clock; that remains 10 years after the owner’s death. Remember, there is no relief for accounts whose owner died prior to 2020. Distributions for those accounts were – and are – still required and grandfathered in under the old rules.

The Bottom Line

Individuals who inherited an IRA after 2019 may need to take annual distributions starting in 2025 and fully distribute the account within 10 years if the original account owner died after reaching RMD age.

Taking the minimum required under the regulations will prevent any penalties but determining the appropriate amount to take to align with their income needs and limiting taxation should also be considered.

Mike Valenti is not affiliated with Cetera Advisor Networks LLC, Member FINRA/SIPC.