The CFP Board Exam and the 10-Year Rule
CFP® Certificants in the News
CFP Board generally considers regulations fair game on the CFP Board exam if they become effective within six months of the exam date. Simple enough, right? As you might suspect, that’s not always the case. We’ll analyze the IRS’s recent re-interpretation of the stretch-IRA killing required distribution rules as a case study in point.
The Ten-Year Rule
The ten-year rule killed the stretch IRA for many designated beneficiaries.1 Before January 1, 2020, a designated IRA beneficiary could generally “stretch” distributions from a decedent’s IRA for as long as the beneficiary’s remaining lifetime. Let’s think through that for a moment—if the beneficiary were a grandchild, the IRA funds (net of required distributions) could grow on a tax-deferred basis for another 50 years or more!
Sadly, sometimes a good thing must come to an end. Effective for IRAs inherited in 2020 and future years, a designated beneficiary2 must generally distribute 100% of the IRA balance by the end of the tenth year following the year of the original owner’s death. Based on IRS illustrations provided at the time, it was assumed that no annual distributions were required during the ten-year period as long as 100% was distributed by the deadline. This is where the plot thickens.
The Revised Ten-Year Rule
The IRS subsequently issued a proposed (not final) regulation that clarified (“re-interpreted” to some commentators) required annual distributions during the ten-year period. Yet the IRS assessed (and then forgave) penalties for failing to comply with the proposed regulation. As a reminder, the penalty for under-distributing a required minimum distribution is 50% of the under-distribution. Ouch! To add yet more drama, the effective date for annual distributions is “no earlier than 2023” under the proposed regulation for the ten-year rule.
Conclusion
What can we take away from this less-than-entertaining gordian knot? In the author’s opinion:
- The basic ten-year rule is fair game and at least moderately likely to be tested on the next and future CFP Board exams, and
- Because the “annual distribution” requirement is now deferred until “no earlier than 2023,” you should stay tuned for the final IRS regulation and then be ready to answer “annual distribution” ten-year rule questions accordingly.
1 Designated beneficiaries are natural persons, not entities such as estates or trusts.
2 Not all designated beneficiaries are subject to the ten-year rule. Eligible designated beneficiaries (e.g., surviving spouse, minors (until they reach the age of majority), the chronically ill or disabled, and age contemporaries of the decedent) are exempt from the ten-year rule.
