In 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law. This wasn’t a radical change, but it did tweak some existing retirement rules. One of the most significant changes was the introduction of the "drain-in-10" rule.
Before the SECURE Act, if you inherited a retirement account, you could take out the money over your lifetime. Now, you have to empty the account within 10 years of inheriting it. This rule applies to non-Roth retirement accounts like traditional IRAs, 401(k)s, and SIMPLE IRAs. Roth accounts have their own rules, which haven’t changed.
Why the change? It’s all about tax revenue. The IRS taxes withdrawals from traditional IRA accounts as regular income. By making people take out all the money within 10 years, it pushes them into higher tax brackets.
For example, let’s say you’re single and earn $40,000 a year. Your parent dies and leaves you $400,000 from their IRA. Before the SECURE Act, you could spread out the withdrawals over your lifetime. Now, you have to take out $40,000 per year, which pushes you into a higher tax bracket.
There are some exceptions to the drain-in-10 rule. It doesn’t apply to people who inherited an IRA or 401(k) before 2020. It also doesn’t apply to surviving spouses, heirs who are no more than 10 years younger than the person who left them the money, and people with disabilities.
The SECURE Act also made other changes. It removed the age limit for contributing to traditional IRA accounts and raised the age for required minimum distributions from 70 1/2 to 72. It made it easier for employers to offer annuities in their 401(k) plans and for part-time employees to participate in retirement plans. It also allows people to withdraw up to $5,000 from their retirement account penalty-free when they have a child.
If you’re planning your estate or you’ve inherited a retirement account, it’s a good idea to talk to a financial advisor. The rules are complicated, and you want to make sure you’re making the best decisions for your situation.
