Haddad Nadworny Sat, Feb 29, 2020 @ 06:00 AM 9 min read

The "10- Year Rule" and After-Tax Strategies to Consider

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the stretch is goneThe SECURE Act* eliminates the “stretch” IRA distribution option for non-eligible designated beneficiaries (see Who is effected). It requires all assets be distributed to non-eligible designated beneficiaries by the end of 10 years - called the "10 year rule"- however annual RMDs are no longer required from these accounts.

In our last blog, When a Special Needs Trust is the Beneficiary of a Retirement Account, we discussed the strategy of having a Special Needs Trust (SNT), with the family member with a disability as eligible designated beneficiary of the SNT, become the owner of an IRA or other qualified retirement plan. 

For everyone who is not an eligible designated beneficiary, the financial impact of the "10 year rule" and deferring distributions is more substantial than one might think.

Case Illustration:

Considering Roth Conversions when subject to the "10 year rule"

Note: This is a hypothetical example and is not representative of any specific situation.  Your results will vary.  The hypothetical rates of return used to do not reflect the deduction of fees and charges inherent to investing. 

Consider the case of Michael, a 40-year-old doctor whose mother passed away suddenly last month leaving him an IRA with a balance of $1 million.

His pre-SECURE Act plan had been to establish a legacy from his mother to his children.  He would draw out the minimum required distribution from the account each year and leave the balance to grow tax -deferred to pass on upon his death.

Now with the mandatory 10-year distribution rule, Michael needs a new analysis to make an informed choice of how to handle the distributions from his inherited IRA.

He reached out to his financial advisor who modeled 2 options for him given the current law. It was shocking to see the massive effect tax- deferred investing has on savings; the SECURE Act potentially cost Michael more than $1 million over a 30-year period.

Michael’s action with the inherited IRA

After-tax account value in 30 years

assuming a 6% pre-tax earnings rate and 30% income tax rate on the earnings and distributions

BEFORE the Secure Act (not an option now)- just take RMDs, let balance stay in the account

$3, 375,243

Leave the money to grow in the tax deferred account for 10 years and then withdraw a lump sum.

$2,805, 905

Take the $1,000,000 distribution today and pursue growth in a taxable account for 10 years.



Watch out for bracket creep

Michael has an established medical practice and is entering his peak earning years. Taking distributions from a qualified tax deferred account does not seem appealing but he has to do something within the next 10 years. The chart above shows taking a large distribution at the end of 10 years as the optimal choice under the new law but there could be drawbacks for Michael. It is important that the distributions not increase his income to the point of increasing his marginal tax rate, effecting his eligibility for qualified business deductions or subjecting his investment income to an additional surtax.

Key_backdoor_ROTHCould converting to a Roth IRA be helpful?

Michael’s advisor asked him to consider converting a portion of the inherited IRA to a Roth IRA. He has space available within his current tax bracket to take a distribution without raising his marginal tax rate and he also has the cash available to pay the taxes that would result from this action. 

Having the full amount of money invested in the new Roth could potentially reap the yield benefits of being allowed to grow tax- free and although Michael’s beneficiaries would also be subject to the 10-year rule upon his death, there would be no tax liability under current laws on distributions from a Roth.  

* The Setting Every Community Up for Retirement Enhancement or SECURE Act was signed into law on December 20, 2019, becoming effective January 1, 2020. The law provides important changes for individuals and small businesses to consider in their retirement, estate and tax planning.


The Roth IRA offers tax deferral on any earnings in the account.  Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply.  Withdrawals  prior to age 59 ½ or prior to the account being open for 5 years, whichever is later, may result in a 10% IRS tax penalty. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

 Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor

Financial planning and investment advice offered through Affinia Financial Group, LLC, a registered investment advisor. Securities offered through LPL Financial, member FINRA/SIPC. Special Needs Financial Planning LLC, Affinia Financial Group, LLC and LPL Financial are separate entities.