With the passage of the 2019 SECURE Act and the proposed regulations regarding RMDs that were published earlier this year in 2022, the so-called “stretch” IRA has been officially eliminated in most cases when the beneficiary is not the spouse. As a result, most non-spouse IRA beneficiaries are now required to empty their inherited IRAs in 10 years resulting in the collection of taxes much quicker by the Treasury Department.
Old Rules Vs. New Rules
Prior to ne new rules, certain non-spouse beneficiaries (e.g., children and grandchildren) could stretch the IRA beneficiary disruptions over their life expectancy. For example, over 50 or 60 years depending on how your the child was; thereby, delaying having to pay taxes as quickly.
Example 1: Solo 401k Participant Deceases Prior to Age 72 (Required Beginning Date)
Jack (61 years old) passed away in March 2022. He named his daughter Mandy (age 40) as the primary beneficiary of his solo 401k plan. Because Jack deceased before his required beginning date (age 72), Mandy can delay until December 31, 2032, to distribute her entire inherited solo 401k balance.
Example 2: Solo 401k Participant Deceases After Age 72 (Required Beginning Date)
Sally (74 years old) passed away in April 2022. She named her son Ben (age 45) as the primary beneficiary of his solo 401k plan. Ben is subject to the 10 year distribution rule. Therefore, Ben has until December 31, 2032, to completely distribute his entire inherited solo 401k plan balance. HOWEVER, Ben is also required to distribute annual minimum distributions based on his single life expectancy (nonrecalculated) for the first 9 years and subsequently distribute any remaining balance in year 10.
Under the new rules, the Department of the Treasury is effectively colleting the taxes due ono the beneficiary IRA much quicker by shortening the distribution period from the life expectancy of the beneficiary to 10 years.
The new proposed Treasury RMD rules impact both IRAs and qualified plans such as 401k plans including solo 401k plans.
