Roth IRAs Funded before 2020
I have a question regarding Roth IRAs and the SECURE ACT: Tax laws specified that inherited Roth IRA funds could be taken with beneficiary’s age RMDs? I think Congress and the IRS rule-makers should consider the following:
I can understand the reasoning of the SECURE act when applied to a Regular IRA; The taxes on those funds have not been paid yet and will be paid when they are withdrawn from the IRA.
But what about those of us that have a current balance in a Roth IRA, on which we have already paid the taxes, both Federal and State?
Shouldn’t those amounts be grandfathered, exempted, or shielded somehow and left alone to be treated with the same rules as when they were put into the Roth IRA?
I believe this new 10-year limit on withdrawing Roth IRA funds should be started with funds added in 2020, not funds already in the Roth account;
That money was already taxed and the taxes due were paid. What happened to the promise; forever tax-free? What is the chance that this section of the law affecting Roth IRAs is an unintended consequence? That it might be exempted?
What happens now? How do new tax laws get translated into IRS rules? When the IRS writes the rules implementing this new law, do they take input? Who advocates for the taxpayer?
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-01 23:19
The Supreme Court in Clark v Rameker (June, 2014) found that inherited IRAs were no longer eligible for preferential treatment as retirement accounts for beneficiaries and that federal creditor protection would not apply to such accounts. This opened the door for several proposals to also curtail the life expectancy stretch for these accounts. Rumors of a pending 5 year rule floated for a couple years. Eventually, the Secure Act produced the 10 year rule with some notable exceptions for EDBs. Apparently, even though almost all Roth IRAs were qualified after the owner’s death, Congress decided that allowing inherited Roth accounts to continue to generate tax free income for many years was not warranted. The IRS has delayed the issue of Regs for the Secure Act due to CARES legislation, Covid lost time, etc. There are many gray issues under Secure so issue of these final Regs would ordinarily take some time in normal times. The IRS has some latitude in developing these Regs, but not to the point that the intent of the Secure Act is undermined.
RMD Regs are written for qualified plans (Sec 401(a)(9) with some carve outs for IRAs mainly due to the option of spousal election of ownership for inherited IRAs and doing spousal rollovers from inherited qualified plans. Spouses do not suffer whatsoever under Secure, but you can expect the loss of preferential treatment for non spouse beneficiaries not to be watered down by the Secure Regs.
The ASPPA is one of the strongest lobbying groups, but from the plan sponsor position, not the taxpayer. The IRS allows public input on major “proposed” Regulations, but don’t think there is much of a chance for Roth IRAs to be differentiated. Note that inherited Roth IRAs do have the advantage of being tax free and therefore beneficiaries to not have to be concerned with how to split taxable distributions over the 10 years. The Roth beneficiary can simply wait until the last year and distribute a tax free lump sum, so effectively they actually do enjoy a longer stretch period with no annual RMDs due except for EDBs who still get the LE stretch.
Secure Act proposed Regs will attract the attention of many influential trust attorneys since Secure wreaked havoc on the benefits of qualified trusts as beneficiaries of all retirement plans. One of the main problems is multi beneficiary trust gray areas were there are some EDBs included.