Man vs. AI chatbot: Good IRA inheritances and retirement revenue

Google reviews that over 650 million individuals actively use its Gemini AI chatbot month-to-month, whereas OpenAI’s ChatGPT has reportedly been downloaded greater than 1.2 billion occasions worldwide.

Like it or hate it, persons are more and more utilizing AI, and they’re doubtless asking questions on cash.

Is {that a} good factor? Let’s discover out.

I will be asking AI fashions private finance questions over the following few months to find out in the event that they’re offering sound monetary recommendation. Then, I will have an issue professional critique the solutions: What did AI get proper? What did it get mistaken? And what have been the fabric omissions?

For instance, in the present day’s query entails stretch IRA distributions for inheritances. For the human in our man versus machine experiment, I’ve requested Brad Herdt, a licensed monetary planner with Deseret Mutual Profit Directors, to weigh in.

It is a difficult and intriguing matter. Thousands and thousands of Individuals are inheriting IRAs yearly as child boomers go away, and whereas heirs used to have the ability to stretch withdrawals over their lifetimes — that modified dramatically when the Safe Act handed in 2019, forcing many to withdraw all the cash (and pay the tax invoice!) inside 10 years.

Beneath is the query we not too long ago posed to ChatGPT and its response:

Query: Can I stretch IRA distributions?

What technique might I exploit to doubtlessly stretch IRA distributions for heirs past 10 years – by deliberately utilizing the Non-Designated Beneficiary (NDB) therapy?

ChatGPT responds to non-designated beneficiary IRA therapy

Wonderful query – and a nuanced one which exhibits you’re excited about the post-SECURE Act panorama with a planner’s mindset.

Let’s unpack this fastidiously.

Background: The ten-12 months rule and Eligible vs. Non-Designated Beneficiaries

Beneath the SECURE Act (2019) and SECURE 2.0, most non-spouse beneficiaries at the moment are topic to the 10-year rule — that means inherited IRA funds have to be totally distributed by the tip of the tenth 12 months following the unique proprietor’s loss of life.

Nonetheless, sure exceptions apply. “Eligible Designated Beneficiaries” (EDBs) — comparable to spouses, minor youngsters of the account proprietor (till they attain majority), chronically in poor health or disabled people, and beneficiaries lower than 10 years youthful than the decedent — should “stretch” distributions over life expectancy.

That’s the conventional channel for prolonged deferrals.

However there’s one other, much less apparent — and typically strategic — path involving intentional “Non-Designated Beneficiary” (NDB) treatment.

The Strategy: Intentionally creating a Non-Designated Beneficiary

If no “designated” (human) beneficiary is named — for example, if the IRA beneficiary is a trust that doesn’t qualify as a “see-through” trust, or the estate itself — the account is treated as if it has a Non-Designated Beneficiary (NDB).

Here’s where it can get interesting:

• If the IRA owner dies after their required beginning date (RBD) — typically April 1 after the year they turn 73 — the NDB must take RMDs over the decedent’s remaining life expectancy (had they lived).
• That’s often longer than 10 years, particularly if the IRA owner dies in their early or mid-70s.
• For example, a 73-year-old’s life expectancy per the IRS table might be about 14 years, allowing post-death distributions to stretch slightly longer than the 10-year rule would permit.

Example

Suppose Jim dies at age 74 in 2025 with a $1 million IRA.

• If his adult daughter is the named beneficiary, she’s subject to the 10-year rule — the IRA must be fully distributed by the end of 2035.
• But if Jim’s estate is the beneficiary (or a non-see-through trust), the account is treated as having NDB status. Because Jim died after his RBD, the IRA can be paid out over Jim’s remaining single-life expectancy — roughly 13.3 years — extending distributions into 2038 or 2039.

Key Caveats

• Control vs. Tax Efficiency: The NDB approach usually sacrifices flexibility and beneficiary control. The IRA must remain payable to the estate or trust, and the tax consequences can be harsher.
• Trust drafting is critical: If using a trust, it must be written carefully. A non-see-through trust (intentionally drafted to fail the “see-through” test) triggers NDB treatment.
• Coordination with estate goals: This strategy can make sense when the owner values post-death control or creditor protection more than tax deferral efficiency.

Planning tip

This “intentional NDB” strategy tends to make the most sense when:

• The IRA owner is already past RMD age,
• Their life expectancy would yield a payout period longer than 10 years, and
• The beneficiaries’ marginal tax rates make a slower, smaller-RMD approach more attractive than the 10-year lump-out.

But it’s a nuanced move — one best coordinated among the financial adviser, estate attorney, and tax professional, since trust language and timing drive the outcome.

What it means to intentionally trigger NDB treatment

Yes, it’s possible to intentionally trigger Non-Designated Beneficiary (NDB) treatment to modestly extend post-death IRA distributions beyond 10 years — but only when:

1. The IRA owner dies after their required beginning date, and
2. The account is left to a non-designated entity (like a non-see-through trust or estate).

It’s a legitimate, though specialized, estate-planning lever — useful for those already in RMD phase who want a slightly longer distribution horizon for heirs, but are comfortable with the trade-offs in flexibility and taxation.

Is ChatGPT’s answer on NBD IRA treatment correct?

Brad Herdt reviewed the question and ChatGPT’s answer to see what the AI chatbot got right, wrong, or forgot to mention.

Here’s what Herdt had to say:

The 10-year rule for inherited retirement accounts, as ChatGPT points out, can be difficult to work around. That is by Congressional design, and while ChatGPT does an OK job in discussing the background of these rules, it struggles to fully articulate the strategy it proposes.

First, ChatGPT summarizes the setting for inherited retirement accounts arguably well (although I disagree with how the LLM broadly paints Non-Designated Beneficiaries as an alternative “path” to being an Eligible Designated Beneficiary (EDB)).

The prompt guides ChatGPT to explore intentionally forcing Non-Designated Beneficiary (NDB) treatment—what has been called the Intentional Non-Designated Beneficiary (INDB) Strategy. This strategy can allow a beneficiary who would otherwise be subject to the 10-year rule to enjoy a longer distribution period, simply by changing how we name them as a beneficiary.

Related: Scott Galloway forecasts next AI impact on American jobs

This is where ChatGPTs knowledge breaks down rapidly. It only explores trust and estate implementation of the INDB Strategy — entirely omitting beneficiary-based implementations. It also miscalculates the life expectancy of a 73- and 74-year-old in its examples (e.g., a 74-year-old has a 15.6 life expectancy under IRS tables, not 13.3).

It misconstrues the INDB Strategy as resulting in smaller—instead of larger—annual RMDs in the early years and overlooks the flexibility the strategy offers in later years.

The intentional use of Non-Designated Beneficiary (NDB) treatment is a very new concept to the financial and tax planning world. It requires an integrated understanding of numerous tax code and regulation provisions. (To my knowledge, few—if any—have ever formally explored and articulated the strategy before I wrote on it!)

For now, this means clients and planners looking to understand the INDB Strategy should avoid depending on predictive large language models.

Associated: Tony Robbins sends sturdy message on 401(okay)s