The SECURE Act Has Significant Tax Rule Changes for IRA Owners

“The SECURE Act changed a lot of what we believe about inherited IRAs,” said Rochelle Schultz, an estate planning lawyer at Weinstock Manion in Los Angeles. “Everyone,” she added, “needs to bring it up to their estate attorneys or financial advisors to make sure beneficiaries understand what’s going to happen.”

The 10-year rule hits retirement accounts inherited from people who pass away on or after January 1, 2020. Wealth advisors call the curb the death of the “stretch IRA,” because an heir can no longer “stretch out” withdrawals from the account over her lifetime. The change reflected the Biden administration’s desire to expand retirement options for Americans while curbing the tax benefits of passing tax-deferred wealth to heirs.

Five years
IRS rules that pre-date the SECURE Act say that if a taxpayer dies before beginning required minimum distributions, typically at age 72, and hasn’t specified who will inherit their IRA or 401(k), then the account goes into the deceased’s estate. The estate’s heir or heirs then have five years to drain the account. The five-year rule also applies to inherited Roth IRAs in existence for less than five years. And it applies to some beneficiaries who inherit a retirement plan through a so-called beneficiary account, like a trust.

Under prior IRS rules, the beneficiary of a broad type of estate planning vehicle known as a “see-through” trust is treated as if she directly inherits the trust’s assets, even as the vehicle is technically the beneficiary. The IRS “looks through” the trust to see that an actual human being — the trust’s beneficiary — is there. Before the 2019 law, those people could stretch out withdrawals over their lifetime. Now, depending on whether the trust is properly set up, the 10-year deadline could be five years.

That's in part because IRS rules for see-through trusts are strict. Along with record-keeping requirements, the tax agency requires that the vehicles be irrevocable, valid and legal in the state where they’re set up and clear about the identity of its beneficiaries. If a trust doesn't meet those requirements, beneficiaries can be required to drain them in five years.

The issue is that the SECURE Act doesn’t spell out whether its 10-year rule applies to see-through trusts. Nor has the IRS offered guidance on the issue. If the rule doesn’t apply, then some beneficiaries of those trusts might have to empty out an IRA within five years as before — an outflow that can spike an heir’s income and tax rate.

“There is still ambiguity as to how the rules surrounding ‘see-through’ trusts will apply post-SECURE Act,” wrote Fidelity Investments earlier this year.