By Sarah Brenner, JD
Director of Retirement Education
The SECURE Act was signed into law in late December of 2019. This new law upended the rules for retirement accounts. With it came many questions, and IRS guidance was eagerly anticipated. Finally, on February 23, the IRS released new proposed regulations that incorporate all the changes brought about by the SECURE Act. Since then, we have been busy combing through 275 pages of complicated new rules. As the dust begins to settle, here are 5 of our takeaways from the new SECURE Act regulations.
1. The RMD rules are more complicated than ever. Under the SECURE Act, when it comes to required minimum distributions (RMDs) the rules have become more complicated, instead of less complicated! We have more kinds of beneficiaries and more distribution options than ever before. It is true that most retirement account beneficiaries are subject to the 10-year rule and are no longer eligible for the stretch. However, while this may seem to make the rules easier, it does not. What the IRS has done in the regulations is simply add the 10-year rule as yet another layer to already complicated rules.
2. What is old is new again. The required beginning date is when RMDs must begin during a retirement account owner’s lifetime. Prior to the SECURE Act, this date played a critical role in determining the options available to beneficiaries. With the SECURE Act, it was thought that this date would no longer matter for many beneficiaries. The new regulations resurrect the importance of this date by requiring annual RMDs be taken by beneficiaries during the SECURE Act’s 10-year period only when the account owner dies on or after the required beginning date.
3. Roth IRAs are even more attractive. Want to avoid the complication of annual RMDs during the 10-year period? The Roth IRA is the answer. Roth IRA beneficiaries are always considered to have died before their required beginning date and are never subject to annual RMDs during the 10-year payout period under the SECURE Act. What is not to like about inheriting a Roth IRA and letting it sit and grow tax free for 10 years? That is a huge advantage for Roth IRAs.
4. Think twice before naming a trust as an IRA beneficiary. The rules that apply when a trust is named as an IRA beneficiary have always been complicated. However, the ability to get the stretch was worth it for many. Now, the SECURE Act regulations make the rules even more complex, and many trusts will be subject to a 10-year payout anyway. This may mean you should think twice about naming a trust as beneficiary. While there are certainly good reasons for doing so, such as providing for a special needs beneficiary or a minor child, in many cases leaving an IRA to a trust may not be worth the cost and administrative headaches.
5. Good advice is essential. For many individuals, their retirement account is their biggest asset and the product of many years of hard work and careful savings. The new regulations make the rules for these accounts more complicated than ever. One wrong move can result in unnecessary taxes and penalties. To protect your legacy, be sure to consult with a knowledgeable advisor who is up to date on the new rules. Find an Advisor | Ed Slott and Company, LLC (irahelp.com)