The Rick Jensen Show: Pro-Rata Distribution Rule for After-Tax IRA Contributions (May 26, 2021)

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On June 2, 2021, The Rick Jensen Show featured a discussion about the IRS’ clarification on the 10-year rule for inherited IRAs, which was introduced in the SECURE Act.

To provide context, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was signed into law in December 2019. Among its provisions was the 10-year rule, which stipulated that non-spousal beneficiaries of inherited IRAs must withdraw the entire balance of the account within 10 years of the account owner’s death, instead of being able to take required minimum distributions (RMDs) over their lifetime.

This rule was seen as a significant departure from the previous rules, which allowed beneficiaries to stretch out the distributions over their lifetimes, thus enabling the IRA to grow tax-free for longer.

The 10-year rule came into effect on January 1, 2020, and since then, there has been some confusion and uncertainty about its application. In particular, questions have arisen around how the 10-year period should be calculated.

The IRS recently issued a clarification, which states that the 10-year period should be calculated from the end of the year in which the account owner died, regardless of when the beneficiary inherits the IRA. This means that if the account owner died in 2020, the beneficiary has until the end of 2030 to withdraw the entire balance of the account.

During the discussion on The Rick Jensen Show, the host and his guests emphasized the importance of understanding the new rules and their implications for retirement planning. They noted that while the 10-year rule may be challenging for some beneficiaries, it also presents an opportunity to strategize around taxes and estate planning.

For example, if a beneficiary inherits an IRA at a relatively young age, they may be able to spread out the distributions over the 10-year period, taking advantage of lower tax rates in their early years and allowing the account to grow tax-free for longer.

Overall, the IRS’ clarification on the 10-year rule for inherited IRAs provides much-needed guidance for taxpayers and financial advisors navigating the new rules. While the rule may present challenges for some beneficiaries, it also presents opportunities for careful planning and tax optimization.