The 10-year rule requires an inherited individual account to be emptied by the end of a calendar year that contains a tenth anniversary. The regulation names three different anniversaries and picks the earliest calendar year among the ones that apply (26 CFR 1.401(a)(9)-5(e)(1)(9)-5)).
Treating it as one deadline measured from one death is where the returns go wrong. So is assuming that nothing has to come out until year ten.
The Rule Is the Five-Year Rule With Two Words Substituted
Section 401(a)(9) governs qualified plans, and it reaches individual retirement accounts secondhand: under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) apply to the distribution of the entire interest of the individual for whose benefit the trust is maintained (26 U.S.C. 408(a)(6)). Rules similar to, not the section itself, so the operative text for an IRA is the regulation.
The 10-year rule is not written as a new rule. In the case of a defined contribution plan, where an employee dies before the distribution of the entire interest, and except in the case of a beneficiary who is not a designated beneficiary, the five-year rule in subparagraph (B)(ii) is applied by substituting “10 years” for “5 years”, and applies whether or not distributions of the employee’s interests have begun in accordance with subparagraph (A) (26 U.S.C. 401(a)(9)(H)(i)).
Those opening scope words carry more weight than the substitution does. A designated beneficiary means any individual designated as a beneficiary by the employee (26 U.S.C. 401(a)(9)(E)(i)), so a beneficiary that is not an individual, an estate or a charity for instance, is not one. The exception at the front of the sentence leaves that case on the original pair of rules: the entire interest within five years of death where the employee died before distributions had begun (26 U.S.C. 401(a)(9)(B)(ii)), and distribution at least as rapidly as under the method in use at the date of death where they had (26 U.S.C. 401(a)(9)(B)(i)).
Three Tenth Anniversaries, Not One
Except as provided in paragraph (f) of the section, the entire interest must be distributed by the end of the earliest of the calendar years described in three separate paragraphs (26 CFR 1.401(a)(9)-5(e)(1)(9)-5)).
Where the designated beneficiary is not an eligible designated beneficiary, the year is the calendar year that includes the tenth anniversary of the date of the employee’s death (26 CFR 1.401(a)(9)-5(e)(2)(9)-5)). This is the case people mean when they say the 10-year rule.
Where the designated beneficiary is an eligible designated beneficiary, the year is the calendar year that includes the tenth anniversary of the date of that beneficiary’s death (26 CFR 1.401(a)(9)-5(e)(3)(9)-5)). The clock does not start at the owner’s death at all.
Where the beneficiary is an eligible designated beneficiary only because they are a child of the employee who had not reached the age of majority, the year is the calendar year that includes the tenth anniversary of the date that beneficiary reaches the age of majority (26 CFR 1.401(a)(9)-5(e)(4)(9)-5)).
The deadline is the end of a calendar year rather than the anniversary date itself, which is a difference of up to a full year and is worth reading off the regulation rather than off a calculator.
Annual Distributions Can Still Be Required Inside the Ten Years
The regulation answers this directly, and it answers it in two sentences that have to be read together.
Where an employee dies after distribution has begun, generally on or after the employee’s required beginning date, distributions must satisfy section 401(a)(9)(B)(i), and the requirement to take an annual distribution in accordance with that sentence continues to apply for every distribution calendar year until the employee’s interest is fully distributed. Where section 401(a)(9)(H) applies to the interest, the distributions also must satisfy either section 401(a)(9)(B)(ii) applied by substituting 10 years for 5 years, or, if the beneficiary is an eligible designated beneficiary, section 401(a)(9)(B)(iii) (26 CFR 1.401(a)(9)-5(d)(1)(9)-5)).
Read the word “also”, and read the “either” that follows it. The annual requirement stands alongside a second requirement, and which second requirement it is depends on the beneficiary’s classification. The trigger for the annual half is whether the owner had reached the required beginning date, which is defined in required minimum distribution along with the applicable age that sets it.
Eligible Designated Beneficiary Status Is Fixed at the Owner’s Death
The exception that keeps a beneficiary out of the plain 10-year deadline is narrow and it is decided once.
Section 401(a)(9)(H)(ii) preserves the life expectancy route in subparagraph (B)(iii) only in the case of an eligible designated beneficiary (26 U.S.C. 401(a)(9)(H)(ii)). The five categories that qualify are listed in required minimum distribution.
The determination of whether a designated beneficiary is an eligible designated beneficiary is made as of the date of death of the employee (26 U.S.C. 401(a)(9)(E)(ii)). A beneficiary who becomes disabled two years later does not become eligible, and one who was within ten years of the owner’s age at that date does not lose the status afterwards.
Two Events Start a Fresh Ten Years
Both are in the statute and both produce a second deadline rather than an extension of the first.
Subject to subparagraph (F), which treats certain amounts paid to a child as paid to the surviving spouse, a minor child ceases to be an eligible designated beneficiary as of the date the individual reaches majority, and any remainder of the portion of that individual’s interest to which subparagraph (H)(ii) applies is distributed within 10 years after that date (26 U.S.C. 401(a)(9)(E)(iii), 26 U.S.C. 401(a)(9)(F)).
Where an eligible designated beneficiary dies before their portion is entirely distributed, the exception under clause (ii) does not apply to any beneficiary of that eligible designated beneficiary, and the remainder of that portion is distributed within 10 years after that beneficiary’s death (26 U.S.C. 401(a)(9)(H)(iii)). A successor beneficiary inherits the deadline, not the status.
When There Is More Than One Beneficiary
Where an employee has more than one designated beneficiary, the deadline rule is applied with respect to the oldest of them, and the applicable denominator is determined using the oldest designated beneficiary (26 CFR 1.401(a)(9)-5(f)(1)(i) and (f)(2)(i)(9)-5)). A minor child among the beneficiaries changes that in three ways at once. The anniversary of the owner’s death stops applying, the anniversary tied to an eligible designated beneficiary’s death is measured as if that death does not occur until all of those children have died, and the majority-age anniversary is measured as if majority is not attained until the youngest of them reaches it (26 CFR 1.401(a)(9)-5(f)(2)(ii)(9)-5)).
Common Questions About the 10-Year Rule
Two, and they work differently. An eligible designated beneficiary keeps the life expectancy route under subparagraph (B)(iii) (26 U.S.C. 401(a)(9)(H)(ii)), which delays the ten years rather than removing them, because the deadline then runs from that beneficiary’s own death. A beneficiary that is not a designated beneficiary is outside the substitution altogether, because of the words that open the provision (26 U.S.C. 401(a)(9)(H)(i)).
It depends on one fact about the owner, not about the beneficiary. Where the owner died on or after the required beginning date, the annual requirement continues for every distribution calendar year until the interest is fully distributed, and the 10-year deadline applies on top of it (26 CFR 1.401(a)(9)-5(d)(1)(9)-5)).
Until the end of the calendar year that contains whichever tenth anniversary applies (26 CFR 1.401(a)(9)-5(e)(1)(9)-5)). Which anniversary that is depends on the beneficiary’s classification at the owner’s date of death, so the classification has to be settled before any distribution schedule is built.
A missed annual distribution inside the ten years surfaces years later, on a return nobody is looking at any more, and it carries the excise tax set out in required minimum distribution. Accountably places trained offshore tax preparers inside US CPA and EA firms, and a firm can put a real block of its own retirement distribution work through a trial task before anything client facing depends on it.
