Until April Reed Crews
The 2019 SECURITY Act stripped many inherited IRA users of the option of extensible distribution, and 16 months later there are still ambiguities regarding their new distribution requirements. To see also : Saving for retirement with a Roth IRA – WSB-TV Channel 2.
April Reed Crews
After the SECURE law became law, it was generally understood that unqualified users would have to vacate their inherited IRAs within 10 years and that they would have discretion on how much they could take each year. Although payments were forced over 10 years instead of over life expectancy, this scenario at least provided users with the ability to control their taxable distributions through advanced tax planning.
In late March, the IRS surprised everyone by publishing IRS Publication 590-B. Typically, Publication 590-B is out of the question and simply summarizes the rules regarding distributions from the IRA. This year, however, for the first time since The SECURE Act, the IRS provided specific allocation instructions for ineligible users – and the instructions are in direct contrast to the way everyone originally interpreted the new requirements.
Identifying “acceptable” and “unacceptable” users
An eligible user can still adjust the allocation over its lifetime according to applicable law. Eligible users include the spouse of the account holder, users with disabilities, those less than 10 years younger than the account holder, minor children of the account holder and “transparent” funds.
Minor beneficiaries can only extend the distribution until they reach the age of majority as defined in the country of residence.
Ineligible beneficiaries are subject to a ten-year rule and include named non-spouse beneficiaries, such as children and grandchildren (who are not minors).
Conflict IRS guidelines?
The guidelines in the 716-page document that originally amounted to the SECURE Act seemed to indicate that users simply had to allocate all funds within 10 years.
Without mentioning the RMD, it was expected that the new ten-year rule for ineligible users would be treated similarly to the five-year rule that takes effect when there is no named user. Under this rule, an individual who is found to be a beneficiary has full discretion on how and when to empty a pension account as long as it has been within a certain period of time. Publication 590-B indicates that the ten-year rule may not be treated in the same way.
The surprise came in publication 590-B when a specific example was included for a user who would be under a new ten-year rule. The example found on page 12 of Publication 590-B, explicitly states that RMDs must be taken.
An example is the following:
Example. Your father died in 2020. You are a specific user of your father’s traditional IRA. You are 53 years old in 2021, which is the year after your father’s death. Use Table I and see that your life expectancy in 2021 is 31.4. If the IRA is worth $ 100,000 at the end of 2020, your minimum allocation for 2021 would be $ 3,185 ($ 100,000 ÷ $ 31.4).
Although many experts believe the IRS will provide additional guidance and allow users greater flexibility in distribution amounts over 10 years, there has been no clarification from the IRS since the publication of Publication 590 in late March.
Both users and experts expect clarity of the original SECURE law, SECURE Act 2.0 is already on the horizon.
Safe Law 2.0
The Committee on Ways and Means passed the “Safe Law 2.0” on May 5, 2021, and the bill has now been sent to the House. If the law is passed, retirement account holders could see several additional changes that will affect their overall planning strategies.
Under the proposed law, the age for required minimum allocations (RMDs) would be increased again. The first safety law increased the age of RMD from 70 ½ to 72 years. These additional changes would increase the age of RMD to 73 in 2022, 74 in 2029, and 75 in 2032. These changes would only affect those aged 20 or under in 2022.
Additional suggestions include:
• increased catch-up limits for 401 (k), 403 (b), SIMPLE plans and IRAs
• fee for Roth contributions after tax in SEP and SIMPLE plans (currently not allowed)
• withdrawal from the penal plan without punishment in case of domestic violence
Advanced distribution planning
Deferred distribution requirements under the original SECURE Act, and now potentially under the Secure Act 2.0, can provide an opportunity for pension account holders and their beneficiaries to use advanced tax planning strategies designed to take some control over the manner and timing of tax payments. With potential income tax growth in sight, these strategies are likely to remain at the forefront of retirement income planning, especially for individuals of high net worth who hold qualified retirement accounts.
About the author: April Reed Crews
April Reed Crews co-is the CEO of Reed Financial Group, a family business founded in 1979. As a trustee and Ed Slott Master Elite advisor to the IRA, she specializes in maximizing her clients ’pensions with advanced tax planning strategies.
Do you have questions about your taxes, personal finances and investments? Get answers!
Email Jeffrey Levine, CPA / PFS, Director of Planning at Buckingham Wealth Partners, to: On the same subject : Retirement expert on Roth IRA. AskTheHammer@BuckinghamGroup.com.
