I am usually patient with the IRS. I understand the massive workload they have, and there are tax cheats lurking around every corner. The IRS does its best to ensure no loopholes exist for bad actors to circumvent tax laws to avoid paying their fair share. However, when it comes to some of the guidance in the recently released SECURE Act regulations, my patience has run out.
Question:
Ed,
I read your 2/28/22 Slott Report on the updated SECURE Act information for non-eligible designated beneficiaries (non-EDBs) that requires annual RMDs to continue if the original owner was taking them prior to his death and also requires the account to be emptied by the end of year 10.
Roth IRAs have always been a great retirement savings tool. While pre-tax retirement accounts allow tax deferred savings, a Roth IRA promises tax-free benefits. They allow you to receive years of earnings in retirement without tax consequences. Those tax-free distributions also have the side benefit of not increasing stealth taxes such as IRMAA surcharges and taxation of Social Security benefits.
The part of the new IRS SECURE Act regulations causing the most reaction is the one requiring annual required minimum distributions (RMDs) for some IRA or workplace plan beneficiaries subject to the 10-year payment rule.
Under the SECURE Act, IRA or plan beneficiaries who are not “eligible designated beneficiaries” (EDBs) are subject to the 10-year rule. (EDBs are surviving spouses; children of the IRA owner or plan participant who are under age 21; disabled or chronically ill individuals; and anyone not more than 10 years younger than the owner/participant.)
Question:
Hello. I was reading the 2/28/22 edition of the Slott Report and noticed the section titled “Beneficiaries Hit w/Annual RMDs and the 10-Year Rule.” It was my understanding that starting 1/1/20, most non-spouse beneficiaries would have 10 years from the year of death to distribute the IRA, with no RMDs required.
The 275 pages of proposed SECURE Act regulations, released by the IRS on February 23, are chock full of little details. Each of these tidbits will have some impact on particular IRA owners and retirement account participants.
One such new rule pertains to the age of majority. When is a minor child recognized as an adult? Existing IRS guidance deferred to the age of majority under state law. This created some confusion as most states said age 18, a couple said 19, and Mississippi said 21. Why is this important? The age of majority dovetails with the opportunity a minor beneficiary has to stretch inherited IRA account assets.
On February 23, 2022, the IRS released the long-awaited proposed SECURE Act regulations. The new regulations clock in at 275 pages and offer guidance on many SECURE Act rules. They also include a few surprises. Here are some highlights.
Question:
If an 80-year-old converts his IRA to a Roth account and dies the following year, when can the beneficiaries begin withdrawing money tax-free from the Roth? Do the beneficiaries have to wait for the expiration of the 5-year period following the conversion?
The amount of annual pre-tax deferrals and Roth contributions you can make to a 401(k) plan is limited by the tax code. If you exceeded that limit in 2021, time is of the essence to correct the error. If you don’t act quickly, the tax consequences can be serious.
For 2021, you were limited to $19,500 in pre-tax deferrals and Roth contributions (plus an additional $6,000 if you were at least age 50 at the end of the year).
The federal ERISA law gives spouses of plan participants in ERISA-covered plans certain rights to the participant’s account. There are two types of ERISA financial protection for spouses. Spouses of IRA owners usually don’t have similar rights.
The first type of protection applies to all ERISA plans. Those plans must automatically treat a married participant’s spouse as his beneficiary – unless the participant designates another beneficiary and the spouse gives written consent. (Spouses in community property states also receive this protection for IRAs established during marriage.)
