The original SECURE Act of 2019 fundamentally changed how inherited retirement accounts are handled, and subsequent legislation (SECURE 2.0, signed in December 2022) along with IRS final regulations issued in July 2024 have added further layers of complexity. If you previously intended to use a “stretch” individual retirement account (IRA) strategy to pass retirement assets to your beneficiaries, it is critical to understand how these laws may affect your estate plan.
Before the SECURE Act, beneficiaries who inherited retirement accounts could take distributions over their lifetime — the so-called “stretch” strategy that provided multi-generational planning opportunities. For example, if a grandparent left a retirement account to her grandchildren, they could potentially spread payouts over several decades. That option has been largely eliminated.
The 10-year rule: The new reality
The SECURE Act requires most non-spouse beneficiaries to empty inherited retirement accounts within 10 years of the account owner’s death. However, the mechanics of how distributions must be taken within that 10-year window depend on an important distinction: whether the original account owner died before or after their Required Beginning Date (RBD).
If the account owner died before their RBD: There are no annual required minimum distributions (RMDs) during the 10-year period. The beneficiary simply needs to withdraw the full balance by the end of the 10th year. This is the more flexible scenario.
If the account owner died on or after their RBD: This is the more complex scenario. Per IRS final regulations effective Jan. 1, 2025, beneficiaries must take annual “stretch-style” RMDs in years one through nine based on their life expectancy, with any remaining balance fully distributed by the end of year 10. Note: The IRS had waived penalties for missed annual RMDs in 2021 through 2024, but that relief period has ended.
What is the RBD?
The Required Beginning Date is April 1 of the year after the account owner turns 73 (under SECURE 2.0, effective Jan. 1, 2023 — previously age 72 and set to increase to 75 in 2033). This date is a critical dividing line in determining which 10-year rule scenario applies.
Exceptions: Eligible designated beneficiaries
Certain “Eligible Designated Beneficiaries” (EDBs) are exempt from the 10-year rule and may still use the stretch IRA strategy. These include:
- Surviving spouses (who now have additional options under SECURE 2.0 — see below)
- Minor children of the account owner (biological or legally adopted) may stretch distributions until age 21, after which the 10-year rule applies
- Individuals who are disabled or chronically ill
- Beneficiaries who are not more than 10 years younger than the account owner (such as a sibling or partner)
Important note on grandchildren: A grandchild is not considered a minor child of the account owner for this purpose and is therefore subject to the 10-year rule, even if they are a minor at the time of inheritance.
New option for surviving spouses (SECURE 2.0)
Prior to the passage of SECURE Act 2.0, a surviving spouse had two options when they inherited their deceased spouse’s IRA: (1) roll the assets over into their own IRA and treat them as their own, or (2) transfer the assets into an Inherited IRA, with options for calculating RMDs depending on whether your spouse had started taking RMDs before their death. SECURE 2.0 added a new option for surviving spouses: They may now elect to be treated as the deceased spouse for RMD purposes, effectively delaying RMDs until the year the deceased spouse would have been required to begin taking them.5 This can be particularly valuable when the surviving spouse is older than the deceased.
Re-evaluate revocable trusts
These changes significantly affect how we plan for the transfer of retirement account wealth. Revocable trusts should be reviewed carefully to ensure they don’t produce unintended tax consequences. This is especially critical when trusts are named as beneficiaries on retirement accounts.
Prior to the SECURE Act, many people created revocable trusts with conduit provisions for retirement assets to allow distributions to be made to the beneficiary over their lifetime under the control of a trustee. Now, under the SECURE Act, for most beneficiaries, the assets in a conduit trust would have to be distributed out under a period of only up to 10 years. A trust that forces distribution of annual RMDs could result in your beneficiary receiving a significant, highly taxable distribution in the 10th year, potentially eliminating any asset protection benefit along the way. This may not be the ideal approach for all beneficiaries. An example would be a beneficiary who is a minor, has a spendthrift tendency, works in a litigious profession (medicine, law, engineering, real estate, etc.), or seeks asset protection for other reasons.
Retirement provisions in revocable trusts need to be reviewed in light of the new annual RMD rules.
Protect assets with a retirement trust
A retirement trust is designed specifically to seek protection for retirement assets for a beneficiary by navigating the nuanced rules of the 10-year rule and its various exceptions. At its core, a retirement trust allows a trustee to control when and how much of the distributed funds are passed to a beneficiary. This discretion is especially valuable when a beneficiary is going through a period of turmoil — such as a divorce, bankruptcy, or creditor issue — because the trustee can withhold or time distributions strategically.
Combining a retirement trust with a Roth IRA (described below) can create a particularly powerful vehicle: tax-free distributions protected by trust structure.
Reduce the tax impact with a charitable trust
If asset protection is less of a concern but minimizing the tax hit from the 10-year rule is a priority, a charitable trust may be the right tool. A charitable trust allows retirement assets to continue growing tax-deferred even after they have been distributed from the retirement account into the trust. Income tax is paid only when the trust distributes to the non-charitable beneficiary (often a child). In essence, a charitable trust recreates much of the benefit of the old stretch IRA.
The charity typically receives the balance of the trust assets when the initial non-charitable beneficiary dies, or at the end of a defined term (for example, 20 years). The only requirement is that the trust is structured to leave at least 10% of the initial contribution to charity.
If charitable giving is a priority, another option is to give retirement assets directly to charity upon death. If you intend to make large charitable gifts, your retirement accounts are the most tax efficient asset to use to make these gifts. You could then use life insurance to replace those assets for your other beneficiaries. Life insurance proceeds are generally income-tax-free to beneficiaries and can be held in a trust for added protection. Speak with your advisor about whether this strategy makes sense for your situation.
Utilize a Roth IRA for wealth transfer
A Roth IRA conversion remains one of the most powerful wealth-transfer tools available. While traditional retirement account distributions are subject to income tax, Roth IRA distributions are generally tax-free. A beneficiary inheriting a Roth IRA may still be subject to the 10-year rule but pays no income tax on any of those distributions — eliminating one of the biggest pain points of the new law.
This makes Roth conversions especially worth considering if you expect your beneficiaries will be in a higher tax bracket than you are now, or if you simply want to leave a clean, tax-free inheritance.
The bottom line
The SECURE Act, SECURE 2.0, and the IRS’s 2024 final regulations have collectively created a complex new landscape for estate and retirement planning. The rules around annual RMDs during the 10-year period, the RBD distinction, and trust planning all require careful attention. Estate plans drafted before 2020 — and even those revised shortly after the original SECURE Act — may need to be revisited in light of the 2024 final regulations.
If you are a Mercer Advisors client, we encourage you to speak with your advisor about reviewing your wealth management and estate plan to ensure your beneficiaries are protected from unintended tax consequences. Not a Mercer Advisors client? Let us give you a second opinion on if your beneficiaries are protected.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
