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SECURE ACT: 10-Year Payout Rule Exceptions

In our recent blog post on the SECURE Act ( we shared information about how the SECURE Act, signed into law at the end of last year, made wide-ranging changes affecting IRAs, 401(k)s, and other qualified retirement plans and retirement plan beneficiaries.

The change generating the most buzz is the death of the “stretch” IRA, which allowed a nonspouse beneficiary of an IRA or 401(k) to draw down the inherited tax-deferred account over his/her lifetime, minimizing the tax hit to the beneficiary. The SECURE Act now requires that beneficiaries draw down the entire account amount within 10 years from the death of the account owner.

There are exceptions to this 10-year payout requirement for individuals who qualify as an “eligible designated beneficiary.” An eligible designated beneficiary can take lifetime required minimum distributions from an inherited IRA based on his/her life expectancy (following pre-SECURE Act rules) rather than be forced to draw down the entire amount within 10 years.

These eligible designated beneficiaries include:

  • Surviving spouses. The only change to the law concerning surviving spouses is that distributions are now delayed until the deceased spouse would have been age 72, rather than age 70 ½.

  • Minor children of the IRA owner. The 10-year payout does not apply to minor children of the account owner. However, when the minor reaches the age of majority (18 in Missouri), the beneficiary will have to draw down the entire account amount by year 10. This exception applies to children of the account owner only, however, not to grandchildren or other relatives.

  • Disabled beneficiaries. For this exception, the IRS defines a “disabled” individual as someone who:

- Is unable to engage in “substantial gainful activity” by reason of any medically determined physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration, and

- Furnishes proof of the disability in the manner required by the IRS.

Entitlement to Social Security disability benefits may be a litmus test for eligibility. Eligibility is determined at the account owner’s death.

  • Chronically ill beneficiaries. The IRS defines a “chronically ill” individual as someone certified by a licensed health care practitioner as:

- Being unable, without substantial assistance, to perform at least 2 activities of daily living (such as eating, toileting, transferring, bathing, dressing and continence) due to a loss of functional capacity for an indefinite period of time (that is reasonably expected to be lengthy in nature), or

- Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

  • Beneficiaries who are less than 10 years younger than the account owner.

It is important to review your existing estate plan in light of the passage of the SECURE Act. Call us today (417-882-2828) to speak to one of Schmidt, Kirby & Sullivan, P.C.’s estate planning attorneys concerning your estate plan.

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