What are Heir’s Considerations Now for Inherited Retirement Accounts?

The SECURE Puzzle

This article will discuss HOW a heir may distribute Required Minimum Distributions (RMDs) over the 10 year period that results from the SECURE Act of 2019*. The pertinent details of the Act relevant to this article will be discussed later.

The below applies to any qualified retirement funds an heir may inherit.

For now, certain heirs** have the option to wait until the END of the 10th year AFTER the year of death (inheritance). However, delaying would result in a BIG addition to their taxable income and thus their taxes (potentially moving into higher tax brackets as a result).

RMDs may be taken out in any amount, and in any year desired (years can even be skipped, all the way to the 10th year), by heirs who don’t qualify for the stretch rules under the SECURE act, as long as they completely empty the inherited retirement account by the END OF year 10 (10th year after date of death, or minor reaching age of majority).**

But, how might an heir withdraw funds “evenly” as a form of consumption smoothing as well as a means to manage the additional income and thus additional income taxes?***

Below is an example, and rule of thumb approach based on estimated expected return on the inherited funds, to “evening”  withdrawals over the 10 year period for heirs. The below is a basic illustration for those primarily in the lower tax brackets, or those near the cusp between two brackets where additional funds would tip them into the higher tax bracket. More advanced situations may be found in the link in footnote # below.

For purposes of illustration, the example is for EACH $100,000 of inherited retirement funds, or fraction thereof. Calculations are mine under a deterministic approach for simplicity of illustration here. Monte Carlo (stochastic approach) could also be used, and is not illustrated here to keep the concept and examples below simpler.

First, the baseline where the money earns very little return (zero in this example) [Note: Returns below are NOT those of the owner, but the returns of the heir once they inherit the retirement funds]:

Source: Author Calculations
Source: Author Calculations

Second, where the money earns 3% per year:

Source: Author Calculations

Finally, where the money earns 5% per year:

Source: Author Calculations

It is important to note that returns are examples here only since they are generally unknown if the funds are invested in the markets (returns may be known if invested in CDs for example). So the point is that these are for illustration purposes only in order to get a sense of how much should be withdrawn to spread the withdrawals over the 10 year period.

IF one could know the return ahead of time, then more shifting of later, higher withdrawals, could be shifted and spread over the earlier years. The higher the return, the more difficult this shifting would become because higher returns generally come from the more unknown returns of the markets.

What’s the rule of thumbs for managing withdrawals, and lowering potential taxes, over the 10 year period?

First notice that the baseline zero return “Factor Withdrawn” is essentially the number of years remaining in the 10-year period after the year of the owner’s death. This is the “FACTOR.”

Then notice that this FACTOR is reduced by the rate of return expected … compare the FACTOR results for the 3% return with the 5% return.

This does result in a slowly increasing dollar withdrawal amount, but this still is spreading the smaller taxable amounts over the 10 years. Compare the lump sum taxable amount (per each $100,000 or fraction thereof) if no withdrawals are taken until the very end. Again, this lump sum may push one into a higher tax bracket resulting in more total taxes paid compared to the total of taxes paid if spread over the 10 year period.

You would need to evaluate your own tax situation, as well as your State’s income taxes, to see how to time withdrawals to minimize income taxes over the total 10 year period. Such an analysis is beyond the scope of this article.

Further spreading of expected earnings on the funds could also smooth the income across the 10 years. Such a method is beyond the scope of this article (I have also developed a “more smoothing method” for clients).

Finally, heirs may simply decide to take all the money at once at anytime (early or late), or in chunks at random times, and thus make a “smoothing” concept moot. The absolute deadline is that all the money is withdrawn by the end of the 10th year after the year of the owner’s death.

Moral of the story:

Though an heir may be tempted to wait and take it all at once, spreading withdrawals out over the 10-year period may reduce TOTAL income taxes paid over the 10 year period compared to taking a big lump sum at the very end. This is because of the risk of bumping up into higher Federal and/or State tax brackets.

There’s a huge issue with what this does to penalties for missed RMDs too should the heir wait until the very end of the 10-year period (and then forget to take the RMD!). This means on those lump sums:  Federal 50% penalty!! PLUS the income taxes PLUS any State penalty PLUS any State income taxes (yes – by the end of all those penalties and taxes, you’d net little).

Lastly, what should an heir do with these withdrawals?

One possibility is to simply take the withdrawals and deposit the after tax (withhold the Federal and State taxes when making the withdrawal) amount into your Roth as a contribution# (do one for the spouse too). This would enhance your own retirement outcome.

Another possibility is to up your (and spouses) 401k contributions# monthly by the monthly amount of the inherited withdrawal, which reduces your income tax from earnings, which would offset the income tax from the inheritance withdrawal. Then use the monthly inheritance withdrawal as your income. Yes, you can spread the withdrawals out monthly rather than just once a year.

Finally, a possibility is to simply take it and spend it. This doesn’t help you over the long run as the above two do though. You can only spend a dollar once! Saved dollars earn more dollars that can be spent later when you’re not working. The goal of retirement is to make work optional! This typical option sets people up for what’s called “Lifestyle Creep.”

# Here are the contribution limits for various retirement plans (all of which have RMD requirements):

IRA & Roth contribution limits

Simple IRA contribution limits

SEP IRA contribution limits

401k (&TSP) contribution limits

403b contribution limits

457 contribution limits

* Setting Every Community Up for Retirement Enhancement (SECIRE) Act. The main observation is that Congress is clearly signaling that the purpose of retirement accounts is to fund the retirement of the original owner; and not to defer for  heirs the taxes due (which I discussed above in What Should Heirs do with their withdrawals).

** “Ding, Dong, The ‘Stretch’ Retirement Account is Dead (Replacing With A New 10-Year Rule)


One of the most significant changes made by the SECURE Act is the elimination of the ‘Stretch’ provisions for most non-spouse beneficiaries of defined contribution plans and IRA accounts (HR 1865, Sec. 401)… a popular retirement-and-estate planning provision that has been under threat of elimination since first proposed in legislation all the way back in 2012.

Under current law for those who have already passed away (or do by the end of 2019), designated beneficiaries (generally, living human beings, and certain qualifying trusts) are eligible to stretch distributions over their life expectancy (or in the case of a qualifying trust, over the oldest applicable trust beneficiary’s life expectancy). [See PS below on caution for trusts now.]

However, for most designated beneficiaries who inherit in 2020 (i.e., where the retirement account owner themselves dies in 2020) and beyond, the new standard under the SECURE Act will be the ‘10-Year Rule’.

Under this 10-Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Similar to the existing 5-year rule for non-designated beneficiaries, though, within the 10-year period, there are no distribution requirements. Thus, designated beneficiaries will have some flexibility when it comes to timing distributions from the inherited account(s) for maximum tax efficiency… as long as the entire account balance has been taken by the end of the 10th year after death.


Notably, while the new general rule under the SECURE Act will be the 10-Year Rule, there are five groups of designated beneficiaries to which the new 10-Year Rule will not apply.

These beneficiaries, referred to as “Eligible Designated Beneficiaries”, are:

  • Spousal beneficiaries;
  • Disabled (as defined by IRC Section 72(m)(7)) beneficiaries;
  • Chronically ill (as defined by IRC Section 7702B(c)(2), with limited exception) beneficiaries;
  • Individuals who are not more than 10 years younger than the decedent
  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority [defined by State law; and THEN the 10 year window starts].

For these Eligible Designated Beneficiaries, it’s ‘business as usual’ – the same rules that applied to them before the SECURE Act will continue to apply after the SECURE Act. They can take distributions over the beneficiary’s life expectancy (and spousal beneficiaries may still engage in a spousal rollover as well). As a result, the ‘Stretch’ isn’t truly ‘dead’, but it will only live on via a small percentage of post-2019 beneficiaries.

In the case of the “Special Rule for Minor Children”, though, the Eligible Designated Beneficiary category is only a limited reprieve, as such minor children will be able to take age-based requirement minimum distributions… until they reach the age of majority [defined by State law], and then the 10-year rule still ‘kicks in’.

It is important to emphasize that the Special Rule for Minor Children applies only to the “child of the employee [or IRA owner] who has not reached majority”. As such, minor children would appear to be ineligible for similar treatment if a retirement account was inherited from a non-parent, such as a grandparent.”


Quoted from Michael Kitces of Nerd’s Eye View at Kitces.com, as part of Michael’s weekly compilation of information for planners; source https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment , which [I’ve edited] for a public audience for clarity and emphasis where needed.

# For a more detailed discussion of various strategies, mostly for high tax bracket situations, here is another great article by Kitces.

*** Assumes the inherited retirement account is NOT a Roth, but all other qualified accounts that deferred income taxes until the money is withdrawn from the retirement account to be taxed at that time. Note that Roth’s DO HAVE THIS RMD requirement too! Although these funds are not taxed at time of withdrawal to the beneficiary, there still is the PENALTY (Federal and State) for missing the RMD! And now, that penalty could be huge because the funds may be left to grow and then forgotten! Look at the lump sum estimates in the above figures to see what that value may grow to under each scenario. The use of Roth’s and Roth conversions has become even more important for retirement account owners BEFORE they pass to heirs (heirs can’t do direct Roth conversions; they can only do current year Roth contributions as discussed above).

PS. Note that use of trusts as a beneficiary should be reviewed by an estate planning attorney who is very familiar with how estate transfer rules clash with taxation rules. Especially close attention should be paid such a mandatory distribution window that results from the SECURE Act may introduce new challenges for certain types of See-Through trusts, where the flexibility eliminates ‘automatic’ annual conduit distributions to beneficiaries and could trigger the sudden liquidation of both the IRA and trust at the end of the 10-year window.

Need help finding a qualified attorney near you?

National resource American Academy of Estate Planning Attorneys

National resource National Academy of Elder Law Attorneys (legal issues of aging and those with special needs of all ages)

Photo by Suzy Hazelwood on Stocksnap


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