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Evolving IRA Distribution Rules Complicate Planning

Unclear IRS guidance, continually evolving IRA distribution rules complicate retirement and estate planning. Adviser April Reed Crews clarifies key points for individuals.

By April Reed Crews

The SECURE Act of 2019 stripped many inherited IRA beneficiaries of the stretch distribution option, and 16 months later, there is still ambiguity on their new distribution requirements.

April Reed Crews is the co-CEO of Reed Financial Group, a family-owned and operated firm founded in 1979. As a fiduciary and an Ed Slott Master Elite IRA Advisor, she specializes in maximizing her clients' retirement with advanced tax planning strategies.

April Reed Crews

After the SECURE Act became law, it was broadly understood that non-eligible beneficiaries would have to empty their inherited IRAs within a 10-year period of time and that they would have discretion on how much they could take each year. Although the payouts were being forced over 10 years instead of over life expectancy, this scenario at least afforded beneficiaries the opportunity to control their taxable distributions with advanced tax planning.

At the end of March, the IRS took everyone by surprise with the release of IRS Publication 590-B. Typically, Publication 590-B is uneventful and simply summarizes rules regarding distributions from IRAs. This year, however, the IRS provided specific instruction on distributions for non-eligible beneficiaries for the first time since The SECURE Act – and the instruction is in direct opposition to how everyone originally interpreted the new requirements.

Defining “Eligible” and “Non-Eligible” Beneficiaries

An eligible beneficiary is still allowed to stretch distributions over their life expectancy under current law. Eligible beneficiaries include spouses of account holders, disabled beneficiaries, those less than 10 years younger than the account owner, minor children of the account holder, and “see-through” trusts.

Minor beneficiaries are only eligible to stretch their distributions until they reach age of majority as defined by their state of residence.

Non-eligible beneficiaries are subject to the 10-year rule, and include named non-spousal beneficiaries such as children and grandchildren (who are not minors).

Conflicting IRS Guidance?

The guidance in the 716 page document that originally outlined the SECURE Act seemed to indicate that beneficiaries simply had to distribute all funds within 10 years.

With no mention of RMDs, the anticipation was that the new 10-year rule for non-eligible beneficiaries would be treated much like the 5-year rule that comes into effect when there is no named beneficiary. Under this rule, the individual who is determined to be the beneficiary has full discretion over how and when to empty a retirement account as long as it was within the specified period of time. Publication 590-B indicates that the 10-year rule may not be treated the same way.

The surprise came in Publication 590-B when a specific example was included for a beneficiary who would be under the new 10-year rule. The example, found on page 12 of Publication 590-B, specifically says RMDs must be taken.

The example is as follows:

Example. Your father died in 2020. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2021, which is the year following your father's death. You use Table I and see that your life expectancy in 2021 is 31.4. If the IRA was worth $100,000 at the end of 2020, your required minimum distribution for 2021 would be $3,185 ($100,000 ÷ 31.4).

While many experts believe the IRS will provide additional guidance and allow beneficiaries more flexibility on distribution amounts over 10 years, there has still not been any clarification from the IRS since Publication 590 was released in late March.

As beneficiaries and experts alike await clarity on the original SECURE Act, SECURE Act 2.0 is already on the horizon.

Secure Act 2.0

The Ways and Means Committee passed “Secure Act 2.0” on May 5, 2021, and the bill is now headed to the House. If voted into law, retirement account owners could see several additional changes that will impact their overall planning strategies.

Under the proposed law, the age for required minimum distributions (RMDs) would increase again. The first Secure Act increased RMD age from 70 ½ to 72. These additional changes would increase the RMD age to 73 in 2022, 74 in 2029, and 75 in 2032. These changes would only impact those who are 72 or younger in 2022.

Additional proposals include:

• increased catch-up contribution limits for 401(k), 403(b), SIMPLE plans, and IRAs

• allowance of after-tax Roth contributions in SEP and SIMPLE plans (currently not permitted)

• penalty-free withdrawals from retirement plan in case of domestic abuse

Advanced Distribution Planning

Delayed distribution requirements under the original SECURE Act, and now potentially under Secure Act 2.0, may provide a window of opportunity for both retirement account owners and their beneficiaries to use advanced tax planning strategies designed to take some control over how and when they must pay taxes. With potential income tax increases on the horizon these strategies will likely remain in the forefront of retirement income planning, particularly for high-net-worth individuals who own qualified retirement accounts.

About the author: April Reed Crews

April Reed Crews is the co-CEO of Reed Financial Group, a family-owned and operated firm founded in 1979. As a fiduciary and an Ed Slott Master Elite IRA Advisor, she specializes in maximizing her clients' retirement with advanced tax planning strategies.

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