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Joe and Lucy - Different Rules Within the 10 Year Period Thumbnail

Joe and Lucy - Different Rules Within the 10 Year Period

While the SECURE Act certainly helped many struggling individuals during the height of the pandemic, some of the regulations are confusing. Here's your guide!

This guide will unlock the answers to many SECURE Act regulations!


Some of the proposed SECURE Act regulations, released in February, are convoluted and unnecessary. We have made our opinions known. Fortunately, many of the confounding new rules – several of which we have written about – will be limited in their impact. However, a new discovery could affect a larger percentage of IRA and 401(k) beneficiaries. The combination of a few basic principles may lead to inherited IRA confusion. Does order + order = chaos?

Example: Joe, age 75, has a traditional IRA (“IRA X”). Joe dies and leaves the IRA to his daughter Lucy. Lucy does NOT qualify to stretch payments as an eligible designated beneficiary (EDB) over her lifetime, so she must apply the 10-year rule. The entire IRA must be emptied by the end of the tenth year after the year of death. Additionally, Joe died after his required beginning date (“RBD” – April 1 of the year after he turned 72), so Lucy must also take required minimum distributions (RMDs) in years 1 – 9 of the 10 years.

The above is straightforward, orderly, and recognized as the proper interpretation of the proposed SECURE Act regulations. But now we add another common scenario that inadvertently dials up the complexity…

Joe also had a 401(k), and he was actively employed until the day he died. Since the 401(k) plan adopted the “still-working exception” and Joe did not own more than 5% of the company, his plan RBD would not have been until April 1 of the year after he separated from service (had he lived). As such, Joe was not yet taking RMDs from the 401(k). Daughter Lucy was the beneficiary of the plan. Since Lucy is not an EDB, she must also apply the 10-year payout rule to the 401(k). However, since Joe died before his plan RBD, Lucy will NOT have RMDs in years 1 – 9 within the 10-year period.

Again, orderly. But Lucy elects to roll the 401(k) assets into an inherited IRA (“IRA Z”), which is a common request. Lucy now has two inherited IRAs from the same decedent. While both inherited IRAs must abide by the same 10-year period, assuming the beneficiary payout guidelines carry over from the plan to the inherited IRA, one of the accounts has annual RMDs in years 1 – 9, and the other does not.

Introducing chaos: We know that inherited IRAs from the same decedent can be consolidated. If Lucy elects to combine the inherited accounts, which of the payout rules will take precedent? Does it matter if she transfers Inherited IRA X to Inherited IRA Z, or visa-versa? Does the fact that she has two different payout rules eliminate her ability to consolidate? And who on this planet will be responsible for tracking what assets came from which account and what payout period is to be followed?

And therein lies the conundrum.

Such a scenario is intriguing because it is not so far-fetched. Many plan participants are currently leveraging the still-working exception. A significant percentage of these same people also have IRAs. I suspect we will see this potentially confusing combination of inherited IRA and inherited 401(k) payout rules more frequently in the years to come. Future guidance from the IRS would certainly be welcome.

By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC

Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 05/25/22, with permission. https://www.irahelp.com/slottreport/joe-lucy-%E2%80%93-different-rules-within-10-year-period, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Chris Cordoba, founder of California Retirement Advisors, is a member of Ed Slott's Master Elite IRA Advisor Group.
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.