By Sarah Brenner, JD
Director of Retirement Education
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Are you thinking of naming a child or grandchild as your IRA beneficiary? With the start of the SECURE Act in January 2020, the rules for inherited IRAs were upended. Prior to the enactment of the SECURE Act, naming a minor as a beneficiary was a good way to take advantage of the stretch IRA. A grandparent could name a young grandchild as their IRA beneficiary and distributions could be paid from the inherited IRA for decades over the long life expectancy of the beneficiary.
The SECURE Act has changed everything. If you are looking to leave your retirement account funds to the next generation, you will need to rethink your estate planning strategy. Post SECURE Act, the rules have changed when it comes to naming a minor as a beneficiary. Now, the stretch IRA is gone for most beneficiaries, including minors. Many are subject to a 10-year payout rule.
Minor Children of the IRA Owner
There is a special rule for some minors. ONLY minor children of the IRA owner are considered to be eligible designated beneficiaries (EDBs) and can take required minimum distributions (RMDs) based on their single life expectancy until age 21. At that time, the 10-year rule would apply.
Under IRS proposed RMD regulations, annual RMDs would be required to continue during years 1-9 of the 10-year period, and the account would need to be emptied by the end of the tenth year.
Example: In 2020, Lisa, age 10, inherits an IRA from her mother. Lisa is an EDB and can stretch distributions over her single life expectancy. This goes on for 11 years. Lisa’s 21st birthday is in 2031. Because Lisa has reached the age of majority (age 21, regardless of state law), the 10-year rule will then apply. Lisa must continue to take annual RMDs in years 2032-2040 and must empty the inherited IRA by December 31, 2041 — the end of the 10th year after she reached age 21.
Grandchildren and Other Minor Beneficiaries
Minor beneficiaries who are NOT the child of the IRA owner cannot delay the 10-year rule until age 21. Other beneficiaries, such as grandchildren, nieces and nephews, are not considered EDBs and would also be subject to the 10-year rule immediately upon the death of the IRA owner. If the IRA owner died before his required beginning date (RBD), annual RMDs would not be required during the 10-year period.
Example: Kevin, age 75, dies in 2023. The beneficiary of his traditional IRA is his grandson, Daniel, age 10. Daniel does not qualify as an EDB because he is not the son of the IRA owner. Daniel will have to take annual RMDs from the inherited IRA based on his single life expectancy for years 2024-2032 (years 1-9 of the 10-year period) because Kevin died after his required beginning date. In addition, the entire remaining inherited IRA balance must be distributed by December 31, 2033.