Cross-Border Question of the Week: Inheriting a 401(k) Before the SECURE Act (December 31, 2019)

Rules for Inheritances Before December 31, 2019

If the account owner passed away before December 31, 2019, the SECURE Act’s 10-year rule does not apply. Instead:

• You continue taking Required Minimum Distributions (RMDs) until the account is fully distributed.
• Non-spouse beneficiaries cannot treat the IRA as their own. They cannot make contributions or roll it into their personal IRA. However, they can keep the inherited 401(k) as it is, transfer it to an inherited IRA, or choose a lump-sum distribution.
• You must take distributions regardless of your age and also satisfy any RMD the original account owner owed in the year of death.
• The “Stretch IRA” option is available, letting you spread withdrawals over your lifetime to smooth out taxes.

Rules for Inheritances After December 31, 2019

The SECURE Act 2.0 introduced the 10-year rule for many beneficiaries, but with important exceptions:

1. Eligible Designated Beneficiaries

These include:

• Spouses or minor children of the deceased account holder
• Disabled or chronically ill individuals
• Individuals not more than 10 years younger than the IRA owner

Options for eligible designated beneficiaries:

• Take distributions over the longer of their own life expectancy or the original account owner remaining life expectancy, or
• Follow the 10-year rule (depending on when the account owner’s RMDs were due to start)

2. Non-Eligible Designated Beneficiaries

These are anyone who inherits an account who isn’t a spouse—such as adult children.

• Starting in 2025, non-eligible beneficiaries will need to:
• Take required minimum distributions (RMDs) each year, and
• Fully distribute the inherited account within 10 years.
• This approach ensures that the account is gradually drawn down, while giving beneficiaries some flexibility in timing.

3. Beneficiaries That Are Not Individuals

For entities (like estates or charities), the rules follow the old pre-2020 framework, since the SECURE Act applies only to individual beneficiaries.

Key Takeaway

Because your sister passed away before 2020, the old “Stretch IRA” rules apply. You simply keep taking your annual RMDs until the inherited IRA is fully distributed—no 10-year rule to worry about.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

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