The Hidden Trap in the 10-Year Rule and How to Plan Around It
I recently met with a prospective client who inherited an IRA. For confidentiality purposes, let’s call her “Sue”.
Sue was under the impression that she needed to withdraw all the funds immediately.
Then, she read that she could take distributions evenly over the next 10 years.
As it turns out, both assumptions are incorrect. Here's WHY:
Under the SECURE Act of 2019, most non-spouse beneficiaries who inherit an IRA after December 31, 2019, are required to withdraw the entire balance within 10 years of the account holder's death.
Additionally, if the original IRA owner had already begun taking Required Minimum Distributions (RMDs), the beneficiary must continue to take annual RMDs during the 10-year period, in addition to ensuring the account is fully distributed by the end of the 10th year (unless they qualify as Eligible Designated Beneficiaries). IRS
Sue is 60 and plans to retire at 62, with Social Security beginning at 67.
This allows us to strategically plan for when Sue takes these beneficiary IRA distributions and take advantage of the lower income during the gap years between ages 62 and 67.
As a bonus, we plan to do Roth conversions during this gap period since Sue also has non-retirement assets to live on.
We’ll then use the beneficiary IRA's distributions to pay taxes for the Roth conversions. Thus, getting as much money into Roth as possible.
This combination of strategies in Sue’s situation underscores the importance of proactive financial and tax planning.
If your advisor isn't reviewing your tax situation and uncovering opportunities like this, are they truly earning their fee?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.
To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.
