Holiday Cheers and Wishes

By Ian Berger, JD
IRA Analyst

This is the time of year for good cheer and holiday wishes. In keeping with those traditions, here are some cheers and wishes for the IRS and Congress:

Cheers to the IRS: Yes, it did take the IRS 4½ years to issue final required minimum distribution (RMD) SECURE Act regulations in July 2024. But the IRS does deserve credit for addressing most of the unanswered questions raised by the SECURE Act and the 2022 proposed regulations. And, aside from the IRS’s stubborn interpretation of the at-least-as-rapidly rule, the final regulations were taxpayer-friendly. The same is true for the proposed SECURE 2.0 regulations issued at the same time.

Wish for the IRS: We cannot let theIRS off the hook completely. In SECURE Act 2.0, Congress added a much-appreciated provision that started in 2024; it allows owners of unused 529 accounts to transfer up to $35,000 of surplus funds tax-free to a Roth IRA for the benefit of the 529 beneficiary. The new law requires that the 529 account must have been held for at least 15 years but fails to address one basic question: If the 529 beneficiary changes, does the 15-year clock start over again or can you get credit for the period with the prior 529 beneficiary? The new law has now been in effect for a full year, but we still have zero guidance from the IRS on this crucial issue.  

Cheers to Congress: This year, unlike in December 2019 and 2022, Congress did not hit us with a last-minute piece of legislation that would make massive changes to the IRA and employer plan tax rules. However, there is already talk that Congress may include provisions in the next tax bill that will require more mandatory Roth contributions. (SECURE 2.0 already requires that, starting in 2026, highly-paid employees who want to make 401(k) catch-up contributions must make them on a Roth basis.) The additional revenue from more “Rothification” would help pay for the renewal of the tax cuts in the 2017 Tax Cuts and Jobs Act, which are due to expire on December 31, 2025. So, next year we may not be so lucky!

Wish for Congress: It may be too big of an ask, but it is long overdue for Congress to start simplifying the retirement account tax rules instead of just piling new complicated rules on top of existing complicated rules. Need some examples? There are now 20 different exceptions to the 10% early distribution penalty (3 of which apply only to IRAs, 6 of which only apply to employer plans, and 11 of which apply to both); 8 different beneficiary RMD rules, depending on when the account owner died and into what category the beneficiary fits; 4 different ages for when RMDs are first due: ages 70½, 72, 73 (and eventually) 75; and 3 different catch-up contribution limits for SIMPLE (!!) plan participants. (And a partridge in a pear tree.)

Cheers and Wishes to You: We would be remiss if we did not give cheers to you, our loyal Slott Report readers, for checking in with us every Monday, Wednesday and Thursday, and for sending us such great questions. Best wishes for a Happy Holiday season!