IRA distributions under SECURE

The 2019 SECURE Act made a major modification to post-mortem distributions of funds from IRAs and qualified retirement accounts to non-spouse designated beneficiaries. In most cases, if a designated beneficiary [DB] has been properly named, the funds have to be distributed, and taxed at ordinary income rates, within ten years of the death of the owner of the account. Previously, the funds could be distributed over the life expectancy of the DB. This is a dramatic shortening of the time for distributions, and for larger accounts this will be a significant change. The distribution schedule should be planned carefully. 

Most lawyers and financial advisors appear to assume that the distribution timeline after the death of the account owner should be the maximum ten years. Many, further, simply assume that 10% of the original amount should be distributed each year. That assumption overlooks the fact that the money invested in the account will continue to generate income and to grow in value over time. If the DB were to withdraw 10% of the funds each year for nine years, the IRA would still have, in the tenth year, 57.6% of the original amount that she started with in year 1. 

Our calculations show that the projection over time often justifies a shorter period of approximately six years. There is relatively little difference between the outcome at the end of a six-year period vs. at the end of a ten-year period. 

The calculations shown here assume an IRA worth $100,000 at the time of the owner's death. They also assume an average growth rate of 3% per year. 

The primary benefit of using the alternative six-year period is that the funds that remain after taxes are paid are in the hands of the beneficiary several years sooner. Over the six years, the distributions are made, beginning at 10% and then increasing by 10 percentage points each year thereafter, until year six, when the amount remaining is distributed. Tax is paid on the distributions, at the Federal marginal rate of 22% in most cases, but then the remaining assets are held outside of the IRA container, and they can continue to appreciate, no longer subject to income tax. The cost basis for purposes of calculating long-term capital gains would be the fair market value on the date of distribution.