Before the SECURE Act, people who didn’t need the money they’d saved in an IRA could leave it to their kids or grandkids. The kids or grandkids could then choose a provision called “stretch,” which allowed them to withdraw money from that IRA based on their life expectancy. In other words, they could let most of that money sit for decades, compounding tax-free.
The recent SECURE Act changed those rules, effectively eliminating the stretch IRA in all but a few special cases. Now, those kids and grandkids would need to start withdrawing money from an inherited IRA much earlier. A 10-year clock starts ticking when the account owner dies. The heirs can either: (a) take the money all in year one, (b) distribute withdrawals evenly over the next 10 years, or (c) take it all in a lump sum at the end of the 10th year. No matter which option they pick, the account needs to be emptied within 10 years of the account owner’s death.
Keep in mind that there are a few exceptions to the 10-year rule: it will not apply to spouses, minor children (until they’re of age), chronically ill or disabled beneficiaries, and beneficiaries less than 10 years younger than the deceased account owner.
Next, we will discuss the drawbacks of the new 10-year rule.