New IRA Distribution Rules

Recently, Congress passed changes to Individual Retirement Accounts and 401(k) plans. The legislation has been pending since early summer of 2019 and was attached to the updated budget bill and signed by President Trump. There are a number of provisions which went into effect on January 1, 2020. In general, the bill provides an increase in tax revenues over the next decade by eliminating a popular planning tool that has been in effect for 20 years. As a result, be advised that there are certain provisions which may significantly impact your long-term estate and tax planning. Some of the highlights are:


1) Required Minimum Distributions (RMD), which are mandatory on the April 1st following an individual turning age 70 ½, will now be pushed back to age 72. If you are already receiving RMDs you must continue taking your annual payouts under the prior law.

2) Penalty Free Withdrawals for birth or adoption expenses of a child of up to $5000. The withdrawal is still taxable income but is not subject to the early withdrawal penalty for withdrawals before reaching 59 ½.

3) Starting in 2024, 401(k) plans will be required to allow part-time employees who work more than 500 hours a year for at least 3 consecutive years to contribute to the plan. Employers do not have to match.


1) Annuities can now be offered as part of a 401(k) plan. Participants who have an annuity option should meet with a financial advisor before purchasing an annuity. The benefit of the annuity is that it creates a steady lifetime income stream similar to a pension benefit from the 401(k) portfolio. Employers with 401(k) plans should review this option with their plan’s investment team. This option is already available for those participants who retire and roll over their qualified funds to an IRA.


1) Payouts to IRA beneficiaries have been significantly changed. Before the change, a beneficiary of an IRA could “stretch” out the RMDs over their own life expectancy. For example, if a 50 year old is the named beneficiary of a $500,000 IRA, their RMD is based upon the beneficiary’s life expectancy which would be approximately 34.2 years. The beneficiary would have to take a RMD each year, but the IRA would not need to be paid out in full for 34.2 years. However, the new rule for beneficiaries of IRAs requires a payout over a 10-year period. If you are already in a stretch-out RMD situation, your RMDs are grandfathered under the prior law. The withdrawals don’t have to be annual withdrawals, but the entire IRA must be distributed by the end of the 10-year period.

2) Exceptions to the new 10-year rule include:

a) Surviving spouses still use their own life expectancy (no change from the prior law).

b) Beneficiaries who are disabled or chronically ill and are not more than 10 years younger than the account holder. This is a grey area which will require rules and regulations to qualify.

c) Children, but not grandchildren, who are minors do not have to start taking their RMD until they are adults. Depending upon which state you live in (Michigan is age 18), that could be anywhere between age 18 - 21. If you are still in school, the RMDs do not need to begin until the beneficiary reaches age 26.


The change to the inherited IRA rules will generate significant income tax revenues to the federal government over the next decade. It also reverses the planning for many individuals who have used Roth IRAs, an IRA beneficiary trust or designations which will control the distributions. As a result there is a conflict to determine what is more important for your family. With the new law, if you want to control the distributions, then there will be a significant income tax liability because of the current estate and trust income tax brackets which reach the highest bracket of 37% at $12,750 for 2019. If you are more concerned about the income tax ramifications than having your beneficiary control the IRA funds, then the 10-year period will reduce the income tax liability.

If you have an IRA Beneficiary Trust in place, it should be reviewed with your estate planning and tax attorney to determine if the agreement needs to be modified.