I’m Retiring Next Year. What Should I Do With My 401(k)?

If you are retiring next year, you generally have three choices for your 401(k): leave it in the plan, roll it to an IRA, or use a combination of both. The right decision depends on withdrawal flexibility, taxes, investments, fees, creditor protection, and how the account will help replace your paycheck. At Greenbush Financial Group, we typically recommend building the retirement income plan first and making the rollover decision around that plan.

What Should You Do With Your 401(k) Before You Retire?

One of the biggest mistakes retirees can make is waiting until after their final day of work to figure out what to do with their 401(k).

Before retirement, your 401(k) is primarily an accumulation account. Money goes in, stays invested, and your paycheck covers your living expenses.

After retirement, that account may have a new job: helping replace your paycheck.

That means the decision is about much more than whether an IRA offers more investment choices.

You need to consider:

• Where your monthly income will come from

• How much money should remain liquid

• Which accounts should be withdrawn from first

• How distributions will affect taxes

• Whether you will lose valuable 401(k) provisions by rolling over

• How the account fits with Social Security, pensions, Roth accounts, and taxable investments

In most cases, retirees can leave the money in the 401(k), roll it into an IRA, or potentially use both.

Your 12-Month-Before-Retirement 401(k) Checklist

Ideally, start reviewing your plan several months before your retirement date.

The Department of Labor describes the Summary Plan Description, or SPD, as the document explaining important features of your retirement plan, including when benefits can be received and how the plan operates.

Before you leave your employer:

1. Get your Summary Plan Description. Do not assume every 401(k) works the same way.

2. Confirm withdrawal rules. Can you take partial withdrawals? Monthly distributions? How quickly are requests processed?

3. Identify the different types of money in the account. You may have pretax, Roth, and after-tax balances.

4. Check for employer stock. Appreciated company stock can create special tax-planning considerations.

5. Determine whether the Rule of 55 applies. This can be particularly important if you retire before age 59½.

6. Review any outstanding 401(k) loans. Separation from employment can change how a loan is handled.

7. Review beneficiaries. Make sure your designations still reflect your estate-planning intentions.

8. Estimate your first one to two years of withdrawals. Know how much of your spending must come from investments before deciding where those investments should be held.

That last step is particularly important.

How Will Your 401(k) Replace Your Paycheck?

Suppose you retire and estimate that your household needs $8,000 per month after taxes.

Your Social Security and pension provide $5,000.

That leaves a $3,000 monthly gap.

Where does that $3,000 come from?

Possibilities include:

• Monthly 401(k) distributions

• IRA withdrawals

• Dividends and interest

• A taxable investment account

• A cash reserve

• A combination of several accounts

This is why we prefer to create the withdrawal strategy before deciding whether the 401(k) should be rolled over.

For example, if your employer's plan makes monthly withdrawals cumbersome, an IRA may provide more flexibility. If the 401(k) offers excellent investments and easy recurring distributions, keeping some money there may work perfectly well.

Key Insight: The account should support your retirement income plan. The retirement income plan should not be designed around limitations you discover after completing a rollover.

How Much Should You Keep in Cash When You Retire?

This often becomes a much bigger concern as retirement approaches.

While working, you can generally tolerate market declines more easily because your paycheck continues arriving.

Once you retire, selling investments during a market downturn can be more problematic. You are withdrawing money while the portfolio is temporarily worth less, leaving fewer investments available to participate in a recovery.

This is commonly referred to as sequence-of-returns risk.

There is no single cash amount that is appropriate for every retiree. The appropriate reserve depends on:

• How much of your spending is covered by Social Security or pensions

• Your withdrawal rate

• Other taxable or Roth assets

• Your investment allocation

• Upcoming major expenses

• Your comfort with market volatility

Example

Assume you need $36,000 annually from your portfolio to supplement Social Security.

Rather than relying on stock sales every month, you might keep part of your near-term spending needs in cash or short-term investments while investing money intended for later years differently.

The important point is not that every retiree should use a particular "bucket strategy."

It is that near-term spending needs should influence how the portfolio is structured before retirement begins.

Should You Leave the Money in Your 401(k)?

Keeping money in the employer plan may make sense if it provides:

• Low-cost institutional investments

• Strong investment options

• A stable value fund or other unique option

• Convenient withdrawals

• Strong creditor protection

• Access to special early-withdrawal rules

One of the most important issues for younger retirees is the Rule of 55.

If you separate from service during or after the calendar year in which you turn 55, distributions from that employer's qualified plan may qualify for an exception to the 10% additional tax on early distributions. This particular exception does not apply to an IRA.

Example

You retire at 57 with $900,000 in your current employer's 401(k).

You expect to need $40,000 from retirement accounts before reaching age 59½.

Rolling the entire account into an IRA without first evaluating the Rule of 55 could eliminate a valuable withdrawal option.

That does not mean you must keep the whole 401(k). It means you should understand what you are giving up before moving it.

When Does Rolling the 401(k) to an IRA Make Sense?

An IRA may offer more flexibility for:

• Investment selection

• Recurring withdrawals

• Account consolidation

• Roth conversions

• Portfolio rebalancing

• Tax withholding

• Coordinating multiple sources of retirement income

For a household managing several accounts, simplification can be valuable.

But do not assume an IRA is automatically cheaper.

Compare Fees Apples to Apples

Imagine your 401(k) has:

• 0.10% investment expenses

• 0.15% administrative costs

Your total plan cost may be roughly 0.25%.

Now assume the proposed IRA uses investments costing 0.15% plus a 1.00% advisory fee.

The IRA offers more flexibility, but it is clearly not less expensive.

The opposite can also occur.

When comparing accounts, look at the complete cost:

401(k):

• Plan administrative fees

• Investment expense ratios

• Other participant fees

IRA:

• Advisory fee

• Investment expenses

• Custodial or transaction costs, if applicable

Fees matter, but cost should be evaluated alongside the services, advice, investments, and planning flexibility you are receiving.

Your 401(k) May Contain More Than One Tax Bucket

A large 401(k) does not necessarily contain one type of money.

Your statement may include:

• Pretax 401(k) contributions

• Roth 401(k) contributions

• Employer contributions

• After-tax employee contributions

Those dollars do not necessarily have to go to the same destination.

IRS rules can allow pretax amounts and after-tax amounts from the same distribution to be directed to different eligible accounts. For example, qualifying pretax amounts may go to a traditional IRA while certain after-tax amounts are directed to a Roth IRA.

This is an area where understanding exactly what is inside the plan before requesting a distribution can make a substantial difference.

Roth 401(k) money also has its own tax characteristics, so do not simply tell the recordkeeper to "roll over everything" without knowing how each source will be handled.

Do You Have an Outstanding 401(k) Loan?

Review this before your employment ends.

Depending on the plan and circumstances, separation from service can result in an unpaid plan loan being offset against your account balance. Special rollover rules can apply to a qualified plan loan offset, including a potentially longer period to replace the offset amount than the normal 60-day rollover window.

The specifics matter.

If you have a large outstanding loan, ask the plan administrator exactly what happens when you retire before setting your final retirement date.

How Do RMDs Affect the 401(k) Versus IRA Decision?

Required minimum distributions, or RMDs, eventually force money out of many pretax retirement accounts.

Under current law, RMDs generally begin at age 73 for people currently subject to that starting age, with later starting ages applying to younger generations under SECURE 2.0. Traditional IRAs require RMDs once the applicable age is reached even if you continue working. Employer plans can sometimes permit a still-working employee to delay RMDs until retirement, although plan terms and ownership rules matter.

RMD administration also differs.

If you have several traditional IRAs, the RMDs can generally be calculated for each IRA and the total withdrawn from one or more of those IRAs. RMDs from employer retirement plans generally must be satisfied separately for each plan.

Under current rules, Roth IRAs and designated Roth accounts in plans do not require lifetime RMDs for the original owner.

For someone retiring years before RMDs begin, that gap can also create a valuable window for strategic Roth conversions.

Do Not Forget the Beneficiaries

For many retirees, a $500,000, $1 million, or larger retirement account is also a significant estate asset.

Review:

• Primary beneficiaries

• Contingent beneficiaries

• Whether your spouse should inherit the account

• Whether children or trusts are named

• How inherited-account tax rules may affect beneficiaries

For many non-spouse beneficiaries, current law generally requires an inherited defined-contribution retirement account to be fully distributed within 10 years, although exceptions and additional distribution rules can apply. Surviving spouses have additional options that non-spouse beneficiaries may not have.

That makes beneficiary planning part of the tax plan, not simply an administrative form you completed 15 years ago.

8 Questions to Ask Your 401(k) Provider Before You Retire

Before making a rollover decision, call HR or the plan recordkeeper and ask:

1. Can I leave my money in the plan after retirement?

2. Can I take partial and recurring monthly withdrawals?

3. Are there fees for distributions?

4. What are my total plan and investment expenses?

5. Does my account contain pretax, Roth, or after-tax money?

6. Do I own employer stock, and what is its cost basis?

7. What happens to my outstanding 401(k) loan when I retire?

8. Can I complete a partial rollover and leave the remaining balance in the plan?

Write down the answers. These details can materially change the decision.

Avoid These Common 401(k) Mistakes

The mistakes we see most often are:

• Rolling over automatically because retirement occurred

• Ignoring the Rule of 55

• Moving employer stock without evaluating its tax treatment

• Failing to identify after-tax or Roth money

• Forgetting about a 401(k) loan

• Comparing fees incompletely

• Requesting a check payable directly to yourself

• Moving the account before creating a withdrawal plan

If an eligible rollover distribution is paid directly to you rather than sent through a direct rollover, retirement plans generally must withhold 20% for federal taxes. A properly structured direct rollover generally avoids that withholding.

Final Thoughts

Deciding what to do with your 401(k) is not simply a choice between an employer plan and an IRA.

Your 401(k) is becoming part of your retirement paycheck.

Before moving it, determine:

• How much income your household needs

• Where that income will come from

• How much liquidity you want for the early retirement years

• Whether the plan contains special tax features

• How withdrawals interact with Social Security and taxes

• What you may lose by completing the rollover

At Greenbush Financial Group, we generally recommend building the retirement income and tax plan first, then determining whether the 401(k), an IRA, or a combination of both best supports that strategy.

The goal is not simply to move the money. It is to make sure the money is structured to support the next phase of your financial life.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Frequently Asked Questions

1. Should I roll my 401(k) into an IRA when I retire?
   Not automatically. An IRA may provide greater flexibility, while a 401(k) may offer attractive investments, lower costs, creditor protection, or withdrawal provisions worth preserving.
2. Can I leave part of my 401(k) and roll over the rest?
   Some plans allow partial rollovers after retirement. This can allow you to preserve useful 401(k) features while gaining IRA flexibility with the remaining assets.
3. How do retirees take monthly income from a 401(k)?
   Some plans allow recurring monthly distributions. Others have more restrictive withdrawal rules. Check the plan before retirement and compare those provisions with an IRA or other sources of retirement income.
4. How much cash should I have when I retire?
   There is no universal amount. Your appropriate cash reserve depends on your spending needs, guaranteed income, portfolio allocation, other assets, and how much protection you want from having to sell investments during a market decline.
5. Is a 401(k) rollover taxable?
   A properly completed direct rollover of pretax 401(k) money to a traditional IRA generally does not create current taxable income. Moving pretax money to a Roth IRA generally creates taxable income.
6. What happens to my 401(k) loan when I retire?
   It depends on the plan. An unpaid balance may become a plan loan offset after separation, and special rollover rules can apply. Review the loan before selecting your retirement date.
7. Should I review my 401(k) beneficiaries before retiring?
   Yes. Retirement is a good time to confirm primary and contingent beneficiaries and coordinate them with your broader estate and tax plan.

The First 3 Years of Retirement: 7 Financial Decisions That Matter More Than You Think

The first three years of retirement can offer valuable planning opportunities, particularly when your paycheck has stopped but Social Security and required minimum distributions have not started. Decisions about withdrawals, Roth conversions, investments, and Medicare often affect one another. Greenbush Financial Group recommends looking at these early retirement decisions as one coordinated plan rather than a series of separate choices.

Why the First Three Years Matter

When your paycheck stops, you suddenly have to decide where your income will come from.

Should you spend cash? Sell investments? Take money from your IRA? Start Social Security?

These decisions are connected.

An extra $50,000 IRA withdrawal, for example, can increase taxable income, reduce your Roth-conversion opportunity, affect capital-gains taxes, potentially increase future Medicare premiums, and reduce future RMDs.

The first few years of retirement may also be some of your lowest-income tax years. If you do nothing, some of those opportunities can disappear.

Consider Mark and Susan.

They are both 64 and retiring with $1.8 million:

• $1.2 million in traditional 401(k)s and IRAs

• $200,000 in Roth IRAs

• $300,000 in a brokerage account

• $100,000 in cash

They expect to spend about $90,000 per year after tax and have not started Social Security.

Their situation illustrates seven decisions that can shape the next several decades.

1. Decide Where Your Retirement Paycheck Comes From

There is no universal rule that says you should spend taxable accounts first and Roth accounts last.

Instead, ask:

Which combination of accounts gives us the income we need without creating unnecessary taxes?

Mark and Susan might fund part of their first year's spending from cash, dividends, and their brokerage account rather than automatically taking $90,000 from an IRA.

That could keep their taxable income lower and leave room for another strategy, such as a Roth conversion.

Retirees should also consider directing dividends and interest to cash instead of automatically reinvesting them.

A reasonable cash reserve depends on the household, but maintaining roughly 12 to 24 months of expected portfolio withdrawals in cash and short-term investments can provide flexibility during a market decline.

Key Insight: Your withdrawal strategy should be based on taxes, markets, and future income, not simply which account has the easiest transfer button.

2. Take Advantage of the Retirement Tax Window

For many retirees, there is a gap between their final paycheck and the beginning of Social Security and RMDs.

That can create unusually low taxable-income years.

Mark and Susan have $1.2 million in tax-deferred retirement accounts. If they leave that money untouched, it could grow substantially before RMDs begin.

Instead, suppose they convert $75,000 per year to Roth for their first three years.

They move:

$225,000 from tax-deferred accounts into Roth accounts.

They pay tax today, but future growth on those dollars occurs inside the Roth, and those converted dollars no longer contribute to their future traditional IRA RMD balance.

If $225,000 subsequently grew at 5% for eight years, it would become roughly $330,000.

The goal is not to convert as much as possible. A conversion can affect tax brackets, capital-gains taxes, Medicare premiums, and other parts of the plan.

The better question is:

How much can we convert at a tax rate we are comfortable paying today compared with the tax rate we may face later?

3. Coordinate Social Security With IRA Withdrawals

Social Security should not be considered separately from investment withdrawals.

Suppose Mark is the higher earner and has a $3,200 monthly benefit at full retirement age. Delaying until age 70 could increase that benefit by approximately 24%, before future cost-of-living adjustments.

But delaying means Mark and Susan need to fund those years from somewhere else.

That can be useful.

They might spend taxable assets while completing Roth conversions before Social Security begins. Later, the larger Social Security benefit reduces the amount the portfolio needs to provide.

There is also a survivor consideration.

If Mark dies first, Susan generally does not continue receiving both Social Security benefits. The higher benefit can therefore become particularly important to the surviving spouse.

Key Insight: Delaying Social Security is not always best. Health, longevity, taxes, portfolio size, and survivor needs all matter.

4. Coordinate Roth Conversions, Capital Gains, and Medicare

This is where retirement tax planning becomes a balancing act.

Suppose Mark and Susan own an investment worth $60,000 with a $30,000 cost basis.

Selling it creates a $30,000 long-term capital gain.

During a low-income retirement year, some or potentially all of that gain could qualify for the 0% federal long-term capital-gains rate, depending on their other income.

That could allow them to diversify the portfolio while increasing the cost basis of their taxable investments.

But there is a catch.

If they complete a large Roth conversion first, that additional income can reduce the amount of capital gains eligible for the 0% rate.

Medicare creates another consideration.

Medicare generally uses income from two years earlier when determining IRMAA surcharges. A large Roth conversion or capital gain today could therefore increase Medicare premiums later.

That does not automatically make the transaction a bad idea.

Sometimes paying additional tax or Medicare premiums today creates greater long-term savings.

The important part is knowing the tradeoff before making the decision.

5. Prepare for RMDs Before You Have RMDs

One of the biggest retirement mistakes is waiting until RMDs begin to start planning for them.

Mark and Susan already have $1.2 million in tax-deferred accounts at age 64.

If those accounts continue growing, future RMDs could create more taxable income than they actually need.

Before RMDs begin, they have more control through:

• Roth conversions

• Strategic IRA withdrawals

• Social Security timing

• Charitable planning

This becomes even more important when one spouse dies.

The surviving spouse may eventually file as single while still owning much of the same IRA assets. That means narrower tax brackets and lower Medicare IRMAA thresholds.

A Roth conversion today should therefore sometimes be evaluated against the survivor's future tax rate, not just the couple's current rate.

6. Have a Plan for a Bad Market in Year One

Imagine stocks fall 25% six months after Mark and Susan retire.

Their expenses do not fall 25%.

Where does their income come from?

This is why retirement portfolios should be designed differently from portfolios that are still accumulating.

If Mark and Susan need $50,000 annually from their portfolio and maintain $75,000 to $100,000 in cash and short-term investments, they may have roughly 18 to 24 months of withdrawals available without relying heavily on stock sales.

During a major decline, income could come from:

• Cash

• Short-term bonds

• Dividends and interest

• Investments that held up better

The goal is to avoid being forced to sell stocks after a major decline simply because the monthly bills are due.

This is called sequence-of-returns risk. Poor returns early in retirement can be particularly damaging when withdrawals are occurring at the same time.

That does not mean retirees should abandon stocks. A retirement lasting 25 or 30 years still needs long-term growth.

The objective is to balance short-term spending needs with long-term growth.

7. Plan for the Expenses and Life Changes That Do Not Fit the Spreadsheet

Retirement rarely follows a perfectly predictable annual budget.

Suppose Mark and Susan decide to spend $100,000 remodeling their home.

Taking $100,000 from an IRA could create a much larger tax bill, reduce Roth-conversion capacity, affect capital-gains taxation, and potentially increase future Medicare premiums.

Paying cash, selling taxable investments, taking an IRA distribution, or financing the project can each produce a different result.

The same planning applies to an RV, new vehicle, vacation home, or other major purchase.

Retirement is also a natural time to review:

• Beneficiaries

• Wills and trusts

• Powers of attorney

• Account titling

• Long-term-care funding

• Emergency reserves

• Charitable giving

Charitably inclined retirees may also benefit from donating appreciated securities, using donor-advised funds in certain situations, or eventually making qualified charitable distributions from IRAs after reaching the eligible age.

One practical question is especially useful for married retirees:

If one of us died tomorrow, could the other person manage everything?

The surviving spouse should know where accounts are held, how income is generated, where estate documents are located, and who to contact.

Option A vs. Option B: What Coordination Can Change

Consider Mark and Susan's first three years.

Option A: Autopilot

They withdraw whatever they need from their IRAs, claim Social Security relatively early, complete no Roth conversions, and wait until RMDs begin to worry about taxes.

Their plan may still work.

But several planning opportunities may disappear.

Option B: Coordinated Planning

Instead, they:

• Fund some spending from cash and taxable investments

• Convert approximately $225,000 to Roth over three years

• Delay the higher earner's Social Security when appropriate

• Realize selected capital gains during lower-income years

• Monitor Medicare IRMAA

• Maintain short-term reserves for market declines

They might actually pay more tax during their first three years.

That can be intentional.

They are potentially trading a higher tax bill today for smaller future RMDs, more Roth assets, a larger Social Security benefit, and greater flexibility for the surviving spouse.

That is the difference between minimizing taxes this year and managing taxes throughout retirement.

How Much Can You Safely Spend?

There is no single withdrawal percentage that answers this question.

Your sustainable spending depends on:

• Portfolio size

• Social Security and pensions

• Taxes

• Investment allocation

• Inflation

• Healthcare expenses

• Longevity

• Large future purchases

For Mark and Susan, the better question is not simply whether $90,000 is a safe percentage of $1.8 million.

It is:

How much does the portfolio need to provide before Social Security begins, and how much will it need to provide afterward?

Retirement income changes over time. Your spending plan should account for those changes.

The First Three Years: A Simple Checklist

Year One

Determine how much you can spend, establish where your retirement paycheck will come from, build cash reserves, review the portfolio, and calculate whether a Roth conversion makes sense.

Year Two

Recalculate taxes, Roth-conversion capacity, capital gains, Medicare exposure, and Social Security timing based on what actually happened during year one.

Year Three

Stress-test the plan for a major market decline, future RMDs, long-term-care costs, large purchases, and the death of either spouse.

What Opportunities Disappear If You Do Nothing?

This may be the most important question.

Doing nothing during the first few years of retirement may not create an immediate problem.

But you may lose:

• Lower-income years for Roth conversions

• Opportunities to realize gains at favorable tax rates

• Additional Social Security growth

• Opportunities to reduce future RMDs

• Years of planning while both spouses can use joint tax brackets

The cost may not show up today.

It may appear 10 or 15 years later.

Final Thoughts

The first three years of retirement are about more than replacing your paycheck.

Withdrawals affect taxes. Taxes affect Roth conversions. Roth conversions can affect Medicare. Social Security affects future withdrawals. Today's IRA balance affects future RMDs. And all of those decisions can look very different after one spouse dies.

There is no universal withdrawal order or Roth-conversion strategy.

At Greenbush Financial Group, we believe the opportunity is in coordinating these decisions around the household's complete retirement plan.

The first few years of retirement give you something valuable: choices.

The goal is to use those choices before they begin disappearing.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Frequently Asked Questions

1. Which account should I withdraw from first in retirement?
   There is no universal order. The best approach may combine cash, taxable investments, traditional retirement accounts, and Roth accounts based on taxes, spending needs, future RMDs, and Social Security.
2. Should I take Social Security or spend investments first?
   It depends on longevity, taxes, portfolio size, and survivor needs. Spending investments first can sometimes create additional Roth-conversion opportunities while allowing Social Security benefits to grow.
3. Should I convert my IRA to Roth before RMDs?
   A partial Roth conversion may make sense if your current tax rate is attractive compared with the rate you or a surviving spouse could face later.
4. How much should I convert to Roth?
   Consider tax brackets, capital gains, Medicare IRMAA, state taxes, and future RMDs. The appropriate amount should generally be recalculated each year.
5. What happens if the market crashes right after I retire?
   Cash and short-term investments can provide spending money without requiring immediate stock sales. This is one reason retirement portfolios should be structured around both withdrawals and long-term growth.
6. Why should I worry about RMDs years before they begin?
   The years before RMDs often provide the most flexibility to reduce future tax-deferred balances through Roth conversions and strategic withdrawals.

This article is for educational purposes and uses simplified hypothetical examples. Tax laws, Medicare rules, investment returns, and individual circumstances can change. The examples are not intended as individualized tax, investment, or legal advice.

The SECURE Act 10-Year Rule Explained: Higher Taxes for Kids Who Inherit IRAs

When Congress passed the SECURE Act, one of the most significant changes for families came from the new 10-year rule for inherited IRAs. The rule eliminated the ability for most non-spouse beneficiaries, especially adult children, to stretch required distributions over their lifetime. Now, they must empty the account within 10 years of inheriting it.

While this might sound simple, the tax impact can be severe. Compressed distribution windows often push heirs into higher brackets, accelerating income tax on decades of savings. Here is what the rule actually requires and how strategic planning can reduce the hit.

What the SECURE Act’s 10-Year Rule Says

Under the SECURE Act, when a child or other non-spouse inherits an IRA or 401(k), they must withdraw all funds by December 31 of the 10th year following the account owner’s death.

Before 2020, many beneficiaries could stretch required minimum distributions over their own life expectancy, sometimes 30 years or more, allowing continued tax-deferred growth. The SECURE Act ended that option for most heirs.

The result is that your kids will likely pay taxes on inherited retirement funds faster, and at potentially higher marginal rates, than they would have under the old rules.

Who the Rule Applies To

The 10-year rule applies to most non-spouse beneficiaries, but there are exceptions.

The rule applies to:

• Adult children or grandchildren
• Siblings, nieces, nephews, or other non-spouse heirs
• Trusts named as beneficiaries unless they qualify as see-through trusts

The rule does not apply to:

• Surviving spouses
• Minor children until they reach age 21, when the 10-year clock starts
• Disabled or chronically ill beneficiaries
• Beneficiaries less than 10 years younger than the account owner

The Hidden Tax Trap

For many families, the problem is not just the loss of tax deferral. It is the timing of the withdrawals. Most heirs inherit these accounts in their 40s or 50s, right in their peak earning years. Adding large inherited IRA distributions on top of salary and bonuses can easily push them into higher tax brackets.

Example:
If your child earns $120,000 per year and inherits a $1 million traditional IRA, they have just 10 years to withdraw it. Even spreading it evenly means an extra $100,000 in taxable income per year, enough to move them into a much higher bracket and increase Medicare or Net Investment Income taxes if applicable.

Our analysis at Greenbush Financial Group shows that this compression effect often results in 5 to 10 percent higher effective tax rates on inherited IRA dollars compared to pre-SECURE Act rules.

Planning Strategies to Reduce the Impact

There are several ways to mitigate the 10-year rule’s tax impact:

1. Roth conversions during your lifetime
   Converting pre-tax IRAs to Roths allows your children to inherit tax-free assets. They will still follow the 10-year withdrawal rule, but distributions will be tax-free.

2. Strategic beneficiary designations
   Leave portions of retirement assets to lower-income heirs or to charitable remainder trusts.

3. Staggered inheritances
   Use taxable accounts, life insurance, or non-retirement assets to balance out future income for your kids.

4. Pre-death withdrawals
   Taking larger distributions during your own lower-income retirement years can smooth taxes across generations.

5. Trust planning
   Review existing conduit trusts. Many written before 2020 no longer operate as intended under the 10-year rule.

At Greenbush Financial Group, we often run multi-scenario tax projections showing how different withdrawal schedules, Roth conversions, or charitable strategies affect heirs’ long-term tax burdens.

Why This Matters for Your Estate Plan

The 10-year rule changed how retirement wealth passes between generations. What used to be a slow, tax-efficient transfer can now create a rapid, high-tax inheritance event.

Updating your beneficiary designations, estate documents, and withdrawal strategy is critical if you want your children to keep more of what you have saved. Even a modest Roth conversion plan or trust revision can reduce total taxes by hundreds of thousands of dollars over time.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQs: SECURE Act 10-Year Rule

1. Do my kids have to take money out every year?
   Maybe. Annual required minimum distributions may be required if the decedent was of RMD age at passing. The RMD amount is likely less than one tenth of the account. The beneficiaries must still empty the inherited IRA by the end of year 10, so creating a strategy to reduce the overall tax burden is recommended.
2. Does the 10-year rule apply to Roth IRAs?
   Yes, but Roth withdrawals are tax-free. Heirs still need to empty the account within 10 years.
3. How does this affect trusts as IRA beneficiaries?
   Many conduit trusts written before 2020 now force the entire balance out in year 10, losing the intended protection and control. These should be reviewed.
4. Can I avoid the 10-year rule for my kids?
   Not directly, unless your child qualifies as an eligible beneficiary such as a minor or disabled dependent. Strategic Roth conversions or life insurance can help achieve similar goals.
5. Should I change my IRA beneficiaries now?
   Possibly. If your current structure assumed lifetime stretch distributions, it is time to review it under the new law.

Retirement Tax Traps and Penalties: 5 Gotchas That Catch People Off Guard

Even the most disciplined savers can be blindsided in retirement by unexpected taxes, penalties, and benefit reductions that derail a carefully built plan. These “retirement gotchas” often appear subtle during your working years but can cost tens of thousands once you stop earning a paycheck.

Here are five of the biggest surprises retirees face—and how to avoid them before it’s too late.

1. The Tax Torpedo from Social Security

Many retirees are surprised to learn that Social Security isn’t always tax-free. Depending on your income, up to 85% of your benefit can be taxed.

The IRS uses something called “provisional income,” which includes half your Social Security benefit plus all other taxable income and tax-free municipal bond interest.

• For individuals, taxes begin when provisional income exceeds $25,000.

• For married couples, it starts at $32,000.

A well-intentioned IRA withdrawal or capital gain can push you over these thresholds—causing a sudden jump in taxes. Strategic Roth conversions and careful withdrawal sequencing can help smooth this out over time.

2. Higher Medicare Premiums (IRMAA)

The Income-Related Monthly Adjustment Amount (IRMAA) is one of the most overlooked retirement costs. Once your modified adjusted gross income (MAGI) exceeds certain limits, your Medicare Part B and D premiums increase—often by thousands of dollars per year.

For 2025, IRMAA surcharges begin when MAGI exceeds roughly $103,000 for single filers or $206,000 for married couples. The catch? Medicare looks back two years at your income. A Roth conversion, property sale, or large one-time distribution can unexpectedly trigger higher premiums two years later.

Proactive tax planning can prevent crossing these thresholds unintentionally.

3. Required Minimum Distributions (RMDs)

Once you reach age 73, the IRS requires you to start withdrawing from pre-tax retirement accounts each year—whether you need the money or not. These RMDs are taxed as ordinary income and can increase your tax bracket, raise Medicare premiums, and reduce your eligibility for certain deductions.

The biggest mistake is waiting until your 70s to plan for them. Roth conversions in your 60s can reduce future RMDs, and charitable giving through Qualified Charitable Distributions (QCDs) can offset the tax impact once they begin.

4. The Widow’s Penalty

When one spouse passes away, the surviving spouse’s tax brackets and standard deduction are cut in half—but income sources often don’t decrease proportionally. Social Security may drop by one benefit, but RMDs, pensions, and investment income remain largely the same.

The result is a higher effective tax rate for the survivor. This “widow’s penalty” can last for years, especially when combined with RMDs and Medicare surcharges. Couples can reduce the long-term impact through lifetime Roth conversions, strategic asset titling, and beneficiary planning.

5. State Taxes and Hidden Relocation Costs

Many retirees move to lower-tax states hoping to stretch their income, but state-level taxes can be tricky. Some states tax pension and IRA withdrawals, others tax Social Security, and a few impose taxes on out-of-state income or estates.

Additionally, higher property taxes, insurance premiums, and healthcare costs can offset income tax savings. A comprehensive cost-of-living comparison is essential before relocating.

Our analysis at Greenbush Financial Group often reveals that the “best” retirement state depends more on quality of life, healthcare access and total cost of living than on income tax rates alone.

How to Avoid These Retirement Surprises

Most retirement gotchas come down to timing and coordination—especially between taxes, Social Security, and healthcare. A few key steps can make a major difference:

• Run retirement income projections that include taxes and IRMAA thresholds.

• Consider partial Roth conversions before RMD age.

• Sequence withdrawals intentionally between taxable, tax-deferred, and Roth accounts.

• Evaluate the long-term impact of home state taxes before moving.

• Review beneficiary and trust structures regularly.

The earlier you identify potential traps, the easier they are to fix while you still control your income and withdrawals.

The Bottom Line

Retirement is more complex than simply replacing a paycheck. The interplay between taxes, healthcare, and income sources can turn small decisions into costly mistakes. By spotting these gotchas early, you can preserve more of your wealth and enjoy a smoother, more predictable retirement.

Our advisors at Greenbush Financial Group can help you identify your biggest risk areas and design a plan to minimize the tax and income surprises most retirees never see coming.

FAQs: Retirement Planning Surprises

Q: Are Social Security benefits always taxed?
A: No. But depending on your income, up to 85% of your benefits may be taxable.

Q: How can I avoid higher Medicare premiums?
A: Manage your income below IRMAA thresholds through strategic Roth conversions and tax-efficient withdrawals.

Q: What happens if I miss an RMD?
A: You could face a 25% penalty on the amount not withdrawn, reduced to 10% if corrected quickly.

Q: Why do widows and widowers pay more in taxes?
A: Filing status changes from joint to single, cutting brackets and deductions in half while much of the income remains.

Q: Are all retirement states tax-friendly?
A: No. Some states tax retirement income or have higher overall costs despite no income tax.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Still Working at 65? Here’s What to Do About Medicare and Social Security

Turning 65 is a milestone that often raises questions about Medicare and Social Security. But if you’re still working — and especially if you have employer-sponsored health insurance — your decisions may not follow the traditional retirement playbook.

This guide outlines what you need to know about how continued employment affects Medicare enrollment and Social Security strategy.

Medicare: Do You Need to Enroll at 65?

You become eligible for Medicare at age 65, but whether you need to enroll right away depends on your health insurance situation.

If You Have Employer Coverage Through a Company with 20 or More Employees

• You can delay Medicare Part B (medical insurance) and Part D (prescription drug coverage) without penalty.

• Many people still choose to enroll in Part A (hospital insurance), which is typically premium-free, while keeping their employer plan as primary coverage.

• However, if you're still contributing to a Health Savings Account (HSA), be careful — enrolling in Medicare Part A makes you ineligible to continue making HSA contributions.

• Once you leave your job or lose coverage, you’ll qualify for a Special Enrollment Period and have eight months to sign up for Medicare Part B without facing late penalties.

If Your Employer Has Fewer Than 20 Employees

• You generally need to enroll in Medicare Parts A and B at age 65. Medicare becomes your primary payer, and your employer plan pays secondary.

• Failing to enroll can result in a gap in coverage and a permanent late enrollment penalty on your Medicare premiums.

• We strongly recommend reaching out to the HR contact at your employer well in advance of your 65th birthday to fully understand what actions you need to take with regard your Medicare enrollment for both you and your spouse if they are covered by your plan as well. 

Don’t Overlook Part D Requirements

If you delay enrolling in Medicare Part D, you must have “creditable” prescription drug coverage through your employer — meaning coverage that is expected to pay, on average, as much as Medicare’s standard prescription drug plan.

Be sure to confirm with your employer that your current plan meets Medicare’s creditable coverage standard to avoid future penalties.

How Social Security Fits Into the Picture

While you can claim Social Security as early as age 62, most people don’t reach their full retirement age (FRA) until age 67. While you are eligible to begin collecting your social security benefit while you are still working and prior to recaching age 67, it may make sense to delay receiving your social security benefits to avoid the earned income penalty.

If you claim before your full retirement age and your earnings exceed the annual limit ($23,400 in 2025), an earned income penalty is assessed against your benefit. For every $2 earned over the limit, $1 in benefits is withheld. These withheld benefits are not lost — your benefit is recalculated at FRA to account for months when payments were withheld.

Example:

If you earn $30,000 in 2025 before reaching FRA, you are $6,600 over the earnings limit. This would result in $3,300 of your Social Security benefits being withheld that year.

After you reach FRA, there is no reduction in benefits, no matter how much you earn.

Also by delay the receipt of your social security benefits, your benefit increase by about 6% per year between the ages of 62 and 67, and then increase by 8% per year between ages 67 and 70.

Key Action Steps at 65 If You're Still Working

• Review your employer health plan: Determine whether it’s considered creditable coverage and how it coordinates with Medicare.

• Decide on Medicare Part A: Enrolling may make sense, but if you're still contributing to an HSA, delay enrollment to remain eligible.

• Verify Part D creditable coverage: Confirm with your employer that your prescription plan meets Medicare’s standards.

• Review your Social Security strategy: Consider whether it makes sense to delay benefits to avoid earnings penalties and increase your monthly payout.

Final Thoughts

Working past age 65 can offer financial flexibility and allow you to delay drawing on Social Security, but it also comes with specific rules around Medicare and benefit eligibility. Taking the time to coordinate your health coverage, HSA contributions, and income planning now can help you avoid unnecessary penalties and make more informed decisions later.

Once you are within 5 year to retirement, it can be beneficial to work with a Certified Financial Planner to create a formal retirement plan which include reviewing what your expenses will be in retirement, social security filing strategy, Medicare coverage, distribution planning, and tax strategies leading up to your retirement date.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

Do I need to sign up for Medicare when I turn 65 if I’m still working?
If your employer has 20 or more employees and provides group health coverage, you can delay Medicare Part B and Part D without penalty. However, if your employer has fewer than 20 employees, you generally need to enroll in Medicare Parts A and B at 65, as Medicare becomes your primary insurance.

Can I keep contributing to my Health Savings Account (HSA) after enrolling in Medicare?
No. Once you enroll in any part of Medicare, including Part A, you can no longer make HSA contributions. To continue contributing, you must delay all parts of Medicare enrollment until after you stop HSA-eligible coverage.

What happens if I delay Medicare Part B & D while keeping employer coverage?
You can delay Part B & D of Medicare if your employer’s health plan is considered “creditable coverage,” meaning it’s as good as or better than Medicare’s standard plan. If your coverage isn’t creditable, you may face a permanent late enrollment penalty when you eventually sign up for Medicare Part B & D.

How does working past 65 affect Social Security benefits?
You can begin Social Security as early as age 62, but if you earn more than the annual limit before reaching full retirement age (FRA), your benefits may be temporarily reduced. After FRA, your earnings no longer affect your Social Security payments, and delayed benefits increase your monthly amount by up to 8% per year until age 70.

Should I enroll in Medicare Part A at 65 even if I’m still covered by my employer?
Many people enroll in premium-free Part A at 65 while keeping their employer plan as primary coverage. However, if you’re still contributing to an HSA, you should delay Part A enrollment to avoid losing HSA contribution eligibility.

What steps should I take as I approach age 65 while still working?
Confirm whether your employer plan is creditable coverage, decide whether to enroll in Medicare Part A, and review how your plan coordinates with Medicare. Also, evaluate your Social Security filing strategy to balance income needs, taxes, and future benefit growth.

Beneficiaries May Need To Take An RMD From A Decedent’s IRA In The Year They Pass Away

A common mistake that beneficiaries of retirement accounts make when they inherit either a Traditional IRA or 401(k) account is not knowing that if the decedent was required to take an RMD (required minimum distribution) for the year but did not distribute the full amount before they passed, the beneficiaries are then required to withdrawal that amount from the retirement account prior to December 31st of the year they passed away.  Not taking the RMDs prior to December 31st could trigger IRS penalties unless an exception applies.

The RMD Requirement for the Decedent

Once you reach a specific age, the IRS requires taxpayers to begin taking mandatory annual distributions from their pre-tax retirement account each year.  These mandatory annual distributions are called RMDs or required minimum distributions.   The age at which an individual is required to begin taking RMDs is also referred to as the “Required Beginning Date” (RBD).  The Required Beginning Date is based on your date of birth:

• Born 1950 or earlier:  Age 72

• Born 1951 – 1959:      Age 73

• Born 1960 or later:      Age 75

Example: If Jim was born in 1953 and turns age 73 this year, and Jim has a Traditional IRA with a $500,000 balance, in 2026, Jim would be required to withdraw $18,867 from his IRA as his annual RMD and pay tax on the distribution.

Undistributed RMD Amount When Someone Passes Away

It’s a common situation for an individual who has reached their Required Beginning Date for RMDs to pass away prior to distributing the required amount from their IRA account for that calendar year.

Example: Jen is age 81; she passed away in February 2026 with a $300,000 balance in her Traditional IRA. Her RMD amount for 2026 would be $15,463. If Jen only distributed $3,000 from her IRA prior to passing away in February, the beneficiary or beneficiaries of Jen’s IRA would be required to withdraw the remaining amount of her RMD, $12,463, prior to December 31, 2026, otherwise the beneficiaries will be faced with a 10% to 25% excise tax on the amount of the RMD that was not withdrawn prior to December 31st.

A Single Beneficiary

If there is only one beneficiary that is inheriting the entire account balance, the process is easy: determine the remaining amount of the decedent’s RMD, and then process the remaining RMD amount from the IRA account prior to December 31st of the year that they passed away. 

Multiple Beneficiaries

When there are multiple beneficiaries of a pre-tax retirement account, the IRS recently released new regulations clarifying a question that has been in existence for a very long time.

The question has been, “If there are multiple beneficiaries of a retirement account, does EACH beneficiary need to distribute an equal share of the decedent’s remaining RMD amount OR do they collectively just have to make sure the remaining RMD amount was distributed but it does not have to be in equal shares?”

I’ll show you why this matters in an example:

Susan passed away before taking her $20,000 RMD for the year. She has a $200,000 balance in her Traditional IRA, and her two kids, Scott and Wanda, are both 50% primary beneficiaries on her account.    The kids set up separate inherited IRAs and transfer their $100,000 shares into their respective accounts.  Scott intends to take a $50,000 distribution from his Inherited IRA, pay the tax, and buy a boat, but Wanda, who is a high-income earner, wants to avoid taking taxable distributions from her Inherited IRA until after she retires.

Since Scott took enough out of his Inherited IRA to cover Susan’s full $20,000 undistributed RMD in the year she passed, is Wanda relieved of having to take an RMD from her account in the year that Susan passed, or does she still need to distribute her $10,000 share of the $20,000 RMD?

The new IRS regulations state that the decedent’s undistributed RMD amount is allowed to be satisfied by “any beneficiary” in the year that they pass away.  Meaning the RMD does not have to be distributed in equal amounts to each beneficiary, as long as the total remaining RMD amount is distributed by one or more of the beneficiaries of the decedent. 

In the example above, if Scott processed $50,000 from his inherited IRA in the year that Susan passed, Wanda would not be required to take a distribution from her inherited IRA that year because Susan’s $20,000 remaining RMD amount is deemed to be fulfilled.

A Decedent With Multiple IRAs

It’s not uncommon for an individual to have more than one Traditional IRA account when they pass away.  The question becomes if they have multiple IRAs and each of those IRAs has an undistributed RMD amount at the time the decedent passes away, can the beneficiaries total up all of the undistributed RMD amounts and take the full amount from one single IRA account OR do they have to take the undistributed RMD amount from each IRA account?

The answer is “it depends”.  It depends on whether the beneficiaries are the same or different for each of their IRA accounts.

Multiple IRAs – Same Beneficiaries

If the decedent has multiple IRAs but the beneficiaries are exactly the same as all of their IRAs, then the beneficiaries are allowed to aggregate the undistributed RMD amounts together and distribute that amount from any IRA or IRAs that they choose before the end of the year. 

Multiple IRAs – Different Beneficiaries

However, in the instance that the decedent has multiple IRAs but has different beneficiaries listed amongst the different IRA accounts, then the decedent’s undistributed RMD amount needs to be taken from each IRA account.

Privacy Issue with Multiple Beneficiaries

I have been a financial planner long enough to know that not all family members get along after someone passes away.  If the decedent had an undistributed RMD amount in the year that they passed and the beneficiaries are not openly sharing their plans regarding how much they plan to withdraw out of their inherited IRA in the year the decedent passed away, it may be impossible to coordinate the disproportionate distributions between the multiple beneficiaries defaulting the beneficiary to taking their equal share of the undistributed RMD amount.

IRS Penalty For Missing RMD

If the beneficiaries fail to distribute the decedent’s remaining RMD amount before December 31st of the year that they pass away, then the IRS will assess a 25% penalty against the amount that was not timely distributed from the IRA account. 

Special Note:  The IRS penalty is reduced to 10% if corrected in a timely fashion.

Automatic Waiver of the RMD Penalty

The final regulations released by the IRS in 2024 granted a very favorable automatic waiver of the missed RMD penalty that did not exist prior to July 2024.    The automatic waiver originally stemmed from the common scenario that if the decedent passed away in December and had not yet satisfied their RMD amount for the year, it was often difficult for the beneficiaries to work with the custodians of the IRA to get those distributions processed prior to December 31st. However, the IRS, being oddly gracious, now provides beneficiaries with an automatic waiver of the missed RMD penalty, specifically for undistributed RMD amounts for a decedent, up until December 31st of the year AFTER the decedent’s death to satisfy the RMD requirement.

When Is No RMD Required?

I have gone through numerous scenarios without stating the obvious.  If the decedent either died before their Required Beginning Date for RMDs or if they died AFTER their Required Beginning Date but distributed their full RMD amount prior to passing away, the beneficiaries are not required to distribute anything from the decedent’s IRA prior to December 31st in the year that they passed away. 

Also, if the Decedent had a Roth IRA, Roth IRAs do not have an RMD requirement, so the beneficiaries of the Roth IRA would not be required to take an RMD prior to December 31st in the year the decedent passes away.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Last updated June, 2026

Frequently Asked Questions (FAQs):

What happens if someone dies before taking their full RMD for the year?
If a person passes away without taking their full required minimum distribution (RMD), their beneficiaries must withdraw the remaining amount by December 31 of that same year. Failing to do so can result in IRS penalties unless an exception or waiver applies.

How can beneficiaries determine if the decedent had an RMD requirement?
The RMD obligation depends on the decedent’s age and date of birth. The Required Beginning Date (RBD) is age 72 for those born in 1950 or earlier, 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later. If the decedent was past their RBD, the RMD rule applies.

If there are multiple beneficiaries, does each person need to take part of the RMD?
No. The IRS clarified in 2024 that any one or more beneficiaries can collectively satisfy the decedent’s remaining RMD. As long as the total required amount is withdrawn from the inherited accounts before year-end, it doesn’t need to be split evenly among beneficiaries.

How are RMDs handled if the decedent had multiple IRA accounts?
If all IRAs have the same beneficiaries, the total RMD amount can be aggregated and taken from any one or more accounts. However, if the IRAs have different beneficiaries, each account’s undistributed RMD must be withdrawn separately from that account.

What are the penalties for missing a decedent’s RMD?
The IRS can impose a 25% excise tax on any undistributed RMD amount not withdrawn by year-end. If corrected promptly, the penalty may be reduced to 10%.

Did the IRS change the RMD penalty rules recently?
Yes. Under final regulations released in 2024, beneficiaries now have an automatic waiver of the missed RMD penalty if they take the decedent’s remaining RMD by December 31 of the year after the death. This provides flexibility in situations where distributions are delayed.

When are beneficiaries not required to take a decedent’s RMD?
No RMD is required if the decedent passed away before reaching their Required Beginning Date or had already completed their RMD for the year. In addition, Roth IRAs are exempt from RMD requirements, so beneficiaries of Roth accounts do not need to take year-of-death distributions.

2023 RMDs Waived for Non-spouse Beneficiaries Subject To The 10-Year Rule

There has been a lot of confusion surrounding the required minimum distribution (RMD) rules for non-spouse beneficiaries who inherited IRAs and 401(k) accounts subject to the new 10-Year Rule.  This has left many non-spouse beneficiaries questioning whether or not they are required to take an RMD from their inherited retirement account prior to December 31, 2023.  Here is the timeline of events leading up to that answer:

December 2019: Secure Act 1.0

In December 2019, Congress passed the Secure Act 1.0 into law, which contained a major shift in the distribution options for non-spouse beneficiaries of retirement accounts. Prior to the passing of Secure Act 1.0, non-spouse beneficiaries were allowed to move these inherited retirement accounts into an inherited IRA in their name, and then take small, annual distributions over their lifetime.  This was referred to as the “stretch option” since beneficiaries could keep the retirement account intact and stretch those small required minimum distributions over their lifetime.

Secure Act 1.0 eliminated the stretch option for non-spouse beneficiaries who inherited retirement accounts for anyone who passed away after December 31, 2019. The stretch option was replaced with a much less favorable 10-year distribution rule.  This new 10-year rule required non-spouse beneficiaries to fully deplete the inherited retirement account 10 years following the original account owner’s death.  However, it was originally interpreted as an extension of the existing 5-year rule, which would not require the non-spouse beneficiary to take annual RMD, but rather, the account balance just had to be fully distributed by the end of that 10-year period.

2022: The IRS Adds RMDs to the 10-Year Rule

In February 2022, the Treasury Department issued proposed regulations changing the interpretation of the 10-year rule.  In the proposed regulations the IRS clarified that RMDs would be required for select non-spouse beneficiaries subject to the 10-year rule, depending on the decedent’s age when they passed away. Making some non-spouse beneficiaries subject to the 10-year rule with no RMDs and others subject to the 10-year rule with annual RMDs.

Why the change? The IRS has a rule within the current tax law that states that once required minimum distributions have begun for an owner of a retirement account the account must be depleted, at least as rapidly as a decedent would have, if they were still alive. The 10-year rule with no RMD requirement would then violate that current tax law because an account owner could be 80 years old, subject to annual RMDs, then they pass away, their non-spouse beneficiary inherits the account, and the beneficiary could voluntarily decide not to take any RMDs, and fully deplete the account in year 10 in accordance with the new 10-year rule. So, technically, stopping the RMDs would be a violation of the current tax law despite the account having to be fully depleted within 10 years.

In the proposed guidance, the IRS clarified, that if the account owner had already reached their “Required Beginning Date” (RBD) for required minimum distributions (RMD) while they were still alive, if a non-spouse beneficiary, inherits that retirement account, they would be subject to both the 10-year rule and the annual RMD requirement.

However, if the original owner of the IRA or 401k passes away prior to their Required Beginning Date for RMDs since the RMDs never began if a non-spouse beneficiary inherits the account, they would still be required to deplete the account within 10 years but would not be required to take annual RMDs from the account.

Let’s look at some examples. Jim is age 80 and has $400,000 in a traditional IRA, and his son Jason is the 100% primary beneficiary of the account. Jim passed away in May 2023. Since Jason is a non-spouse beneficiary, he would be subject to the 10-year rule, meaning he would have to fully deplete the account by year 10 following the year of Jim’s death. Since Jim was age 80, he would have already reached his RMD start date, requiring him to take an RMD each year while he was still alive, this in turn would then require Jason to continue those annual RMDs during that 10-year period.  Jason’s first RMD from the inherited IRA account would need to be taken in 2024 which is the year following Jim’s death.

Now, let’s keep everything the same except for Jim’s age when he passes away. In this example, Jim passes away at age 63, which is prior to his RMD required beginning date. Now Jason inherits the IRA, he is still subject to the 10-year rule, but he is no longer required to take RMDs during that 10-year period since Jim had not reached his RMD required beginning date at the time that he passed.

As you can see in these examples, the determination as to whether or not a non-spouse beneficiary is subject to the mandatory RMD requirement during the 10-year period is the age of the decedent when they pass away.

No Final IRS Regs Until 2024

The scenario that I just described is in the proposed regulations from the IRS but “proposed regulations” do not become law until the IRS issues final regulations. This is why we advised our clients to wait for the IRS to issue final regulations before applying this new RMD requirement to inherited retirement accounts subject to the 10-year rule.

The IRS initially said they anticipated issuing final regulations in the first half of 2023. Not only did that not happen, but they officially came out on July 14, 2023, and stated that they would not issue final regulations until at least 2024, which means non-spouse beneficiaries of retirement accounts subject to the 10-year rule will not face a penalty for not taking an RMD for 2023, regardless of when the decedent passed away. 

Heading into 2024 we will once again have to wait and see if the IRS comes forward with the final regulations to implement the new RMDs rules outlined in their proposed regs.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.