Just when we thought we understood the new IRS regulations on required minimum distributions (RMDs), here comes more uncertainty.As we have reported, the IRS threw everyone a curveball with its interpretation of the 10-year payout rule under the SECURE Act in its proposed regulations issued on February 23. For most non-spouse beneficiaries, the SECURE Act replaced the life expectancy payout rule (also known as the “stretch IRA”) with a new 10-year rule. It is clear that the 10-year rule requires that the entire IRA account be emptied by December 31 of the 10th year following the year the IRA owner died.
Here we go again. In my March 14 Slott Report entry (“Monitoring Concurrent Life Expectancies? – SMH”), I railed against the IRS for a seemingly pointless rule in the new SECURE Act regulations directed at elderly IRA beneficiaries. (Subsequently, I saw other commentary criticizing that same rule as “nasty” and “mean spirited.”) In today’s article, I am back on my soapbox calling out more baffling guidelines.
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.)
Towards the end of each year, the IRS announces cost-of-living increases for several retirement-related dollar limits that will become effective for the next year. For example, last November, the IRS said that the limit on employee pre-tax deferrals and Roth contributions in company plans would increase to $20,500 for 2022. You may have also seen that the IRS compensation limit also increased for 2022 to $305,000. What is this limit all about?
On April 14, we reported that the IRS was apparently interpreting the SECURE Act's 10-year payout rule in a surprising way – to require annual required minimum distributions (RMDs). Now, the IRS has made it clear (without actually saying so) that its prior interpretation was a mistake.The SECURE Act changed the payout rules for most non-spouse beneficiaries of IRA owners who die after 2019. Those beneficiaries can no longer use the stretch IRA. Instead, they are subject to a 10-year payout rule, which requires the entire IRA to be paid out within 10 years of the owner’s death.
If you sponsor a solo 401(k) plan, beware!The IRS recently announced that it is targeting several employer plan areas for stepped-up auditing. One of those areas is solo 401(k) plans.The fact that solo plans made the list is a signal that the IRS believes there are widespread compliance issues with these plans. While solo 401(k) plans don’t have as many rules to follow as employer-based 401(k) plans, there are still several requirements. The IRS announcement should be a warning to business owners with solo plans to make sure they are obeying those rules.
The IRS has recently added a new reason for self-certification of late rollovers to its list. Revenue Procedure 2020-46 modifies the list of reasons to include an IRA or company plan distribution made to a state unclaimed property fund and later claimed by an IRA owner or plan participant. Rev. Proc. 2020-46 is effective as of October 16.
In Notice 2020-68, issued September 2, 2020, the IRS gave limited guidance on certain retirement provisions of the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). The SECURE Act was signed into law on December 20, 2019.Notice 2020-68 does not address one of the most significant SECURE Act changes: the elimination of the stretch IRA for most non-spouse beneficiaries and its replacement with a 10-year payout period.
Admittedly, it’s not such a bad problem to have. Nonetheless, it’s true that high-paid company plan participants can have their benefits limited by the IRS compensation limit.The compensation limit is $285,000 for 2020 and goes up most years based on cost-of-living increases. It was $280,000 for 2019 and $275,000 for 2018.Pay above the limit can’t be used in determining employer contributions made to 401(k) plans and SEP and SIMPLE IRAs. Excess pay also can’t count towards benefits earned in defined benefit pension plans.
After a six-month sprint through a diabolical obstacle course of new laws, a pandemic, record unemployment, deaths, confusion and complete disruption of everyone’s professional and personal lives, this seems like a good time to recap the madness of the pr
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