Understanding the 10-Year Rule for Inherited Retirement Accounts

Today we’re diving into a really important rule that affects many people who inherit retirement accounts: the 10-Year Rule. Whether you’ve inherited an IRA, a 401(k), or you’re planning your estate, you’ll want to understand how this rule works and what it means for your financial strategy.

We’ll break this down into easy sections: what the 10-Year Rule is, who it applies to, how it works in practice, exceptions you need to know, and some smart strategies to consider 

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Transcript

[00:00:00] Speaker 1: Welcome to Wealth Grow, where we discuss building wealth, [00:00:04] Speaker 1: securing your future, [00:00:05] Speaker 1: and making informed financial decisions. [00:00:08] Speaker 1: My name is Stuart Cameron, [00:00:10] Speaker 1: OSJ branch manager and financial adviser [00:00:13] Speaker 1: with Wharton Investment Consultants. [00:00:16] Speaker 1: And today, we are diving into a really important rule [00:00:19] Speaker 1: that affects many people who inherit right retirement accounts, [00:00:24] Speaker 1: the ten year [00:00:26] Speaker 1: rule. Whether you've inherited an IRA, [00:00:29] Speaker 1: a four zero one k, [00:00:31] Speaker 1: or you're planning your estate, [00:00:33] Speaker 1: you'll want to understand how this rule works and what it means for your financial strategy. [00:00:39] Speaker 1: We'll break this down into easy sections. [00:00:42] Speaker 1: What the 10 rule 10 rule is, who it applies to, [00:00:46] Speaker 1: how it works in practice, [00:00:48] Speaker 1: exceptions you need to know, and some smart strategies to consider. [00:00:55] Speaker 1: So what is the ten year rule? [00:00:58] Speaker 1: Let's start with the basics. [00:01:00] Speaker 1: The ten year rule is part of the secure Act of 2019, [00:01:05] Speaker 1: which brought big changes to how retirement accounts are handled after someone dies. [00:01:11] Speaker 1: In short, if you inherited a retirement account, [00:01:14] Speaker 1: you now generally have ten years to fully withdraw all the money from that account. [00:01:21] Speaker 1: Before the secure Act, many beneficiaries [00:01:23] Speaker 1: could stretch distributions over their own lifetime, [00:01:27] Speaker 1: which allowed the account to keep growing tax deferred for many years. [00:01:32] Speaker 1: The new rule sped things up quite a bit. [00:01:37] Speaker 1: So who does the rule apply to? [00:01:40] Speaker 1: So So who needs to follow the ten year rule? It applies to most non spouse beneficiaries. [00:01:47] Speaker 1: If you inherit a retirement account from someone who passed away in 2020 [00:01:52] Speaker 1: or later and you're not their spouse, [00:01:55] Speaker 1: chances are this rule affects you. [00:01:58] Speaker 1: But there are exceptions, [00:02:00] Speaker 1: which we'll get into soon. [00:02:02] Speaker 1: First, some common examples [00:02:04] Speaker 1: of people subject to the rule [00:02:07] Speaker 1: include [00:02:08] Speaker 1: adult children inheriting from their their parents, [00:02:12] Speaker 1: friends or more distant relatives listed as beneficiaries, [00:02:16] Speaker 1: non individuals like estates [00:02:18] Speaker 1: or certain trusts. [00:02:21] Speaker 1: How does the ten year year rule work? [00:02:24] Speaker 1: Okay. So what does it actually mean to have ten years? [00:02:27] Speaker 1: Here's the key. [00:02:29] Speaker 1: You must withdraw all funds [00:02:32] Speaker 1: from the inherited account [00:02:34] Speaker 1: by December 31 [00:02:36] Speaker 1: of the tenth year [00:02:38] Speaker 1: following the original account owner's death. [00:02:42] Speaker 1: You can take out money in any any pattern, [00:02:44] Speaker 1: little by little, [00:02:46] Speaker 1: all at once at the end or in random chunks. [00:02:51] Speaker 1: The catch? [00:02:52] Speaker 1: Every dollar you withdraw counts as taxable income if it's from a traditional retirement account. [00:02:59] Speaker 1: For Roth IRAs, the withdrawals are tax free, but the ten year deadline still applies. [00:03:07] Speaker 1: Key exceptions to know. [00:03:09] Speaker 1: Now let's talk about the exceptions. [00:03:11] Speaker 1: The secure Act created a group called eligible [00:03:15] Speaker 1: designated [00:03:16] Speaker 1: beneficiaries[00:03:17] Speaker 1: or EDBs, [00:03:19] Speaker 1: who are not bound by the ten year rule and can still stretch distributions over their lifetime. [00:03:25] Speaker 1: These include [00:03:27] Speaker 1: surviving spouses, [00:03:29] Speaker 1: minor children of the account owner, but only until they reach age 21, [00:03:35] Speaker 1: disabled individuals, [00:03:38] Speaker 1: chronically illest individuals, [00:03:41] Speaker 1: and beneficiaries who are less than ten years younger [00:03:44] Speaker 1: than the deceased. [00:03:47] Speaker 1: Each of these categories has its own nuances, but the big takeaway is if you fall into one of these groups, you might have more flexible Options. [00:04:02] Speaker 1: Common mistakes to avoid. [00:04:04] Speaker 1: So let's go over some common mistakes. [00:04:08] Speaker 1: Missing the deadline. [00:04:10] Speaker 1: If you don't withdraw all the funds in ten years, the IRS can hit you with a hefty [00:04:16] Speaker 1: penalty. Misunderstanding [00:04:18] Speaker 1: your status. [00:04:19] Speaker 1: Some people assume they qualify as an EDB [00:04:23] Speaker 1: when they don't. [00:04:24] Speaker 1: always double [00:04:26] Speaker 1: check. tax surprises. [00:04:28] Speaker 1: Remember, large withdrawals in a single year [00:04:32] Speaker 1: can push you into a higher tax bracket. [00:04:37] Speaker 1: Now for some strategy. [00:04:40] Speaker 1: Spread out withdrawals to manage your tax bill. [00:04:44] Speaker 1: Roth conversions [00:04:56] Speaker 1: estate, be strategic about who you name estate, [00:04:59] Speaker 1: be strategic [00:05:00] Speaker 1: about who you name as beneficiaries, [00:05:03] Speaker 1: keeping these rules in mind. [00:05:06] Speaker 1: A quick note, tax laws can change. [00:05:10] Speaker 1: There's ongoing debate about retirement account rules, [00:05:13] Speaker 1: so it's wise to stay updated or work with a pro to keep your plan aligned with current law. [00:05:23] Speaker 1: To wrap up, the ten year rule is a major shift in how inherited retirement accounts work. [00:05:30] Speaker 1: If you're a beneficiary [00:05:31] Speaker 1: or you're planning your estate, [00:05:34] Speaker 1: understanding this rule is key to avoiding pitfalls [00:05:37] Speaker 1: and making the most of your financial legacy. [00:05:41] Speaker 1: Thanks for joining me on this episode of WellGo. [00:05:45] Speaker 1: If you found this helpful, please subscribe and leave us a [00:05:49] Speaker 1: Got questions or a topic you'd like us to cover? review. [00:05:52] Speaker 1: Reach out on social [00:05:54] Speaker 1: media or at whartonic@Ceteranetworks.com. [00:05:59] Speaker 1: Thanks for listening. And until next time, plan wisely, [00:06:03] Speaker 1: invest smartly, [00:06:04] Speaker 1: and build a legacy that lasts. [00:06:07] Speaker 1: These podcasts are brought to you by Wharton Investment Consultants, [00:06:11] Speaker 1: 5010 Canby Drive, Wilmington, Delaware 19808. [00:06:17] Speaker 1: Telephone, (302) [00:06:18] Speaker 1: 239-2111. [00:06:22] Speaker 1: Securities [00:06:23] Speaker 1: and advisory services offered through registered representatives [00:06:27] Speaker 1: of Sotera Advisor Networks LLC, [00:06:30] Speaker 1: member FINRA f SIPC, [00:06:34] Speaker 1: a broker dealer and a registered [00:06:36] Speaker 1: investment [00:06:37] Speaker 1: adviser. Cetera is under separate ownership [00:06:40] Speaker 1: from any other named entity. [00:06:42] Speaker 1: The views depicted in this material are for information purposes only [00:06:47] Speaker 1: and are not necessarily those of Cetera Advisor Networks LLC. [00:06:52] Speaker 1: They should not be considered specific advice[00:06:54] Speaker 1: or recommendations for any individual. [00:06:58] Speaker 1: Neither Cetera Advisor Networks LLC [00:07:01] Speaker 1: nor any of its representatives [00:07:03] Speaker 1: may give legal or tax advice. [00:07:06] Speaker 1: All investing involves risk including the possible loss of principal. [00:07:11] Speaker 1: There is no assurance that any investment strategy will be successful. [00:07:17] Speaker 1: The opinions contained in this material are those of the author and not a recommendation [00:07:22] Speaker 1: or solicitation [00:07:23] Speaker 1: to buy or sell investment products. [00:07:26] Speaker 1: This information is from sources believed to be reliable, [00:07:30] Speaker 1: but Centerra Advisor Networks LLC cannot [00:07:34] Speaker 1: or represent that it is accurate [00:07:37] Speaker 1: or complete.