Last Chance to Override 5-Year Rule and Stretch 401(k)s Inherited in 2019

Danielle Fellage |

Last Chance to Override 5-Year Rule and Stretch 401(k)s Inherited in 2019

Jun 3, 2021 / By Denise Appleby, APA, CISP, CRC, CRPS, CRSP

Designated beneficiaries who inherited 401(k)s and other retirement accounts in 2019 get a one-year extension to override the 5-year rule. The deadline is extended from December 31, 2020, to December 31, 2021.


Clients who inherited assets held in an employer plan in 2019 and are required to fully distribute the account within five years might be able to override that limitation and stretch distributions over their life expectancies. But to do so, they must take action by December 31, 2021. For this purpose, employer plans include qualified plans such as 401(k) and pension plans, 403(b) plans and governmental 457(b) plans.


If a beneficiary inherited assets that are held in an employer plan before 2020 and the owner died before the required beginning date (RBD), the beneficiary generally has two options for distributing the inherited account. The 5-year rule and the life-expectancy rule. The terms of the plan document determine whether both or one of the two options are available.

The following are some key terms that are relevant to this article:

  • Plan document: The set of rules that dictate the terms of the employer plan under which the inherited retirement account or benefit (account) is held.
  • The RBD: The RBD is April 1 of the year that follows the year in which the account owner (participant) reached age 70½. If permitted under the employer plan, the RBD can be deferred past that date until April 1 of the year that follows the year in which the participant separates from service with the plan sponsor (employer).
  • The 5-year rule: Under the 5-year rule, the beneficiary chooses whether to take any distributions in years one through four. But the entire account balance must be distributed by the end of year five. This is extended to six years for accounts inherited in 2015–2019 because a recent law—The Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides that 2020 is not counted when counting the 5-year period.
  • The life-expectancy rule: Under the life expectancy rule, the designated beneficiary would take distributions over their life expectancy every year beginning by December 31 of the year that follows the year the participant died. The life expectancy would be determined based on the Single Life Expectancy Table published by the IRS. As above, the CARES Act waived these distributions for 2020.
  • Designated beneficiary: Only a designated beneficiary is eligible to use the life expectancy rule when the participant died before the RBD. Generally, a designated beneficiary is a person who inherits a retirement account. A trust can also be a designated beneficiary if certain specific requirements are met.


    Whether a beneficiary is a designated beneficiary for an account inherited in 2019 would have been determined as of September 30, 2020. A beneficiary who is unsure about whether she is a designated beneficiary should consult with her tax advisor or attorney.

Limited scope: The rules that apply if the participant died on or after the RBD are different and are not discussed in this article as they are irrelevant to the strategy being discussed. Additionally, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the distribution options for accounts inherited after 2019 and these are also not covered herein.

Tax impact of 5-year rule vs. life expectancy rule

A designated beneficiary who inherited a significant amount under a retirement account might find that it is more tax favorable to take life expectancy distributions than having to fully distribute the account within five years. This is because the life expectancy distributions would generally require smaller amounts to be included in income each year.

Consider the following example:

401(k) participant profile

  • Date of birth: 01/01/1958
  • Date of death: 01/01/2019

Designated beneficiary profile

  • Date of birth: 01/01/1970
  • Date of death: N/A

Assumed rate of return: 5%

Total distribution amounts under each option

Life expectancy distributions: Assuming distributions are taken under the life expectancy option and that no more than RMDs are taken each year, the total distributions would be about: $1,362,000. The amount distributed each year would range from about $15,000–$78,000. These smaller amounts could help to keep the beneficiary in a lower tax bracket than taking larger amounts within five years, thus reducing the tax impact. Additionally, amounts that remain after RMDs would continue to grow on a tax-deferred basis. Finally, all distributions would be tax-free if the account is a Roth.

The following table shows the annual RMD amounts, using the profile above.

Annual RMD Amounts Based on Given Profile
Year Balance LE Distribution Total Distributions
2020 $500,000.00   $0.00 $0.00
2021 $525,000.00 33.2 $15,813.25 $15,813.25
2022 $534,646.09 34.2 $15,632.93 $31,446.18
2023 $544,963.82 33.2 $16,414.57 $47,860.75
2024 $554,976.71 32.2 $17,235.30 $65,096.05
2025 $564,628.48 31.2 $18,097.07 $83,193.12
2026 $573,857.98 30.2 $19,001.92 $102,195.04
2027 $582,598.86 29.2 $19,952.02 $122,147.06
2028 $590,779.18 28.2 $20,949.62 $143,096.68
2029 $598,321.04 27.2 $21,997.10 $165,093.78
2030 $605,140.14 26.2 $23,096.95 $188,190.73
2031 $611,145.35 25.2 $24,251.80 $212,442.53
2032 $616,238.23 24.2 $25,464.39 $237,906.92
2033 $620,312.53 23.2 $26,737.61 $264,644.53
2034 $623,253.67 22.2 $28,074.49 $292,719.02
2035 $624,938.14 21.2 $29,478.21 $322,197.23
2036 $625,232.93 20.2 $30,952.13 $353,149.36
2037 $623,994.84 19.2 $32,499.73 $385,649.09
2038 $621,069.87 18.2 $34,124.72 $419,773.81
2039 $616,292.41 17.2 $35,830.95 $455,604.76
2040 $609,484.53 16.2 $37,622.50 $493,227.26
2041 $600,455.13 15.2 $39,503.63 $532,730.89
2042 $588,999.08 14.2 $41,478.81 $574,209.70
2043 $574,896.28 13.2 $43,552.75 $617,762.45
2044 $557,910.71 12.2 $45,730.39 $663,492.84
2045 $537,789.34 11.2 $48,016.91 $711,509.75
2046 $514,261.05 10.2 $50,417.75 $761,927.50
2047 $487,035.47 9.2 $52,938.64 $814,866.14
2048 $455,801.67 8.2 $55,585.57 $870,451.71
2049 $420,226.91 7.2 $58,364.85 $928,816.56
2050 $379,955.16 6.2 $61,283.09 $990,099.65
2051 $334,605.67 5.2 $64,347.24 $1,054,446.89
2052 $283,771.35 4.2 $67,564.61 $1,122,011.50
2053 $227,017.08 3.2 $70,942.84 $1,192,954.34
2054 $163,877.95 2.2 $74,489.98 $1,267,444.32
2055 $93,857.37 1.2 $78,214.48 $1,345,658.80
2056 $16,425.03 1 $16,425.03 $1,362,083.83

Calculator used: Brentmark Distributions Live @ . With permission from Nicole Maholtz, CEO

5-year rule: Assuming no distributions taken until the end of the 5-year period, the total distributions would be about $638,000.

How to override the 5-year rule

If a beneficiary inherited a qualified plan account in 2019, the terms of the plan might default to the 5-year rule. In such cases a designated beneficiary is generally required to take action by December 31, 2020 to be eligible to take distributions over her life expectancy. However, the deadline was postponed to December 31, 2021. The following are the two scenarios that could apply.

1: The plan document permits the participant to choose

The terms of a plan document may permit the participant or a designated beneficiary to choose between the 5-year rule or the life-expectancy rule. This election is generally required to be made by December 31 of the year that follows the year the participant died.

Example: John, a 401(k) participant whose date of birth is January 1, 1958, died in 2019. His beneficiary is his sister Lupita.

Under the terms of the 401(k)-plan document. Lupita must elect the 5-year rule or the life expectancy rule by December 31, 2020.

Postponed deadline: The SECURE Act allows the plan to be amended to allow Lupita—and other beneficiaries in the same category, to make the election by December 31, 2021.

2. The only option is the 5-year rule

The terms of a plan document may provide that the 5-year rule is the only option available when the participant died before the RBD. If an inherited account is subject to this limitation, a designated beneficiary of such an account can override it and use the life expectancy option by rolling over the balance to a beneficiary IRA that allows life expectancy distributions. Such a rollover must be done as a direct rollover (paid directly to the beneficiary IRA) by December 31 of the year that follows the year the participant died.

Example: Jackie, a 401(k) participant whose date of birth is January 1, 1959, died in 2019. Her beneficiary is her brother, Ray. Under the terms of the 401(k)-plan document, Ray is subject to the 5-year rule. Ray may override the 5-year rule by moving the amount via a direct rollover to a beneficiary IRA that allows life expectancy distributions by December 31, 2021 (extended from December 31, 2021 under the SECURE Act).

Advisor action plan

As you meet with clients during 2021, be sure to ask them if they inherited any retirement accounts in 2019, and if so, determine whether the 5-year rule applies. The plan administer should be able to provide information about the distribution options that apply to the beneficiary. Ideally such information should be provided in writing in an official plan-related document like an explanation of the distribution options or a summary plan description.

Those who want to use the 5-year rule may do so by distributing the entire balance December 31, 2025. This is an option even if the life-expectancy rule is available under the plan.

But if a designated beneficiary wants to use the life expectancy rule and it is not the default option under the plan, the plan administrator should be contacted to ensure any required action—whether it is an election or performing a direct rollover to a beneficiary IRA that permits life expectancy distributions—is taken by December 31, 2021.