Photo credit: diedoe
The SECURE Act made sweeping changes to the rules for most inherited retirement plans, effective January 1, 2020. However, not all inherited retirement plans are changed by that date. If plan in question is a government retirement plan, such as a 457 or 403(b) plan, the implementation date is January 1, 2022. There are a few other cases when 2022 is the implementation date as well.
Specifically, the 10-year distribution rule goes into effect in January 2022 for the following two situations:
- Plans maintained pursuant to a collective bargaining agreement (unless the collectively bargained agreement terminates sooner).
- Governmental plans, such as 403(b) and 457 plans sponsored by state and local governments, and the Thrift Savings Plan (TSP) sponsored by the Federal government. Not surprising, this includes the TSP that congress-people are participants in.
These government retirement plans use the old rules for inheritances occurring during 2020 and 2021, but beginning in 2022 the new rules will take effect. At that time, unless you are considered an Eligible Designated Beneficiary (see below), if you’ve inherited one of these plans you’ll need to distribute the entire account within 10 years. There is no annual distribution requirement, as long as the account is fully distributed within 10 years of the death of the original owner.
As a refresher, Eligible Designated Beneficiaries are:
- Spouse beneficiaries
- Minor child (of the original owner) beneficiaries
- Disabled beneficiaries
- Chronically Ill beneficiary
- Beneficiary who is not more than 10 years younger than the original owner
Each of these beneficiary classes has the option of using the old-style of required distribution of inherited IRAs, utilizing the individual beneficiary’s own lifetime as the period over which to distribute the account.
If you inherit government retirement plans after 2022 and you’re not one of the above-listed Eligible Designated Beneficiaries, you are stuck with the 10-year payout rule.
Lastly, there is one additional exception to the January, 2020 implementation date:
Annuities in which individuals have already irrevocably annuitized over a life or joint life expectancy, or in which an individual has elected an irrevocable income option that will begin at a later point, are exempt entirely (and simply follow the already-binding contractual provisions of the annuitized contract).