#RMD

In early 2022, the IRS issued proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022, which was passed in late 2022. In the meantime, the IRS has issued interim RMD relief and guidance for 2023. Final RMD regulations, when issued, will not apply before 2024.

Relief with respect to change in RMD age to 73

The RMD age is the age at which IRA owners and employees must generally start taking distributions from their IRAs and workplace retirement plans, though an exception may apply if an employee is still working for the employer sponsoring the plan. For Roth IRAs, RMDs are not required during the lifetime of the IRA owner.

The SECURE 2.0 Act of 2022 increased the general RMD age from 72 to 73 (for individuals reaching age 72 after 2022). Since then, some individuals reaching age 72 in 2023 have taken distributions for 2023 even though they do not need to take a distribution until they reach age 73 under the changes made by the legislation.

Distributions from IRAs and workplace retirement plans can generally be rolled over tax-free to another retirement account within 60 days of the distribution (RMD amounts cannot be rolled over). The 60-day window for a rollover may already have passed for some individuals who took distributions that were not required in 2023.

To help those individuals, the IRS is extending the deadline for the 60-day rollover period for certain distributions until September 30, 2023. Specifically, the relief is available with respect to any distributions made between January 1, 2023, and July 31, 2023, to an IRA owner or employee (or the IRA owner’s surviving spouse) who was born in 1951 if the distributions would have been RMDs but for the change in the RMD age to 73.

Tip: Generally, only one rollover is permitted from a particular IRA within a 12-month period. The special rollover allowed under this relief is permitted even if the IRA owner or surviving spouse has rolled over a distribution in the last 12 months. However, making such a rollover will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. Note that an individual could still make direct trustee-to-trustee transfers since they do not count as rollovers under the one-rollover-per-year rule.

Inherited IRAs and retirement plans

RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.

Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., at age 31).

The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.

The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2023 during one of the 10-year periods (similar relief was previously provided for 2021 and 2022). For example, relief may be available if the IRA owner or employee died in 2020, 2021, or 2022 and on or after their required beginning date* and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, or 2023 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, or 2022 and annual distributions were not taken in 2021, 2022, or 2023 as required (during the 10-year period following the eligible designated beneficiary’s death).

*The required beginning date is usually April 1 of the year after the IRA owner or employee reaches RMD age. Roth IRA owners are always treated as dying before their required beginning date.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

In late May 2023, Congress sent a letter to U.S. Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel saying that it will introduce legislation to correct several technical errors in the SECURE Act 2.0. The letter, signed by Senators Ron Wyden (D-OR) and Mike Crapo (R-ID), chair and ranking member of the Senate Finance Committee, respectively, and Representatives Jason Smith (R-MO) and Richard Neal (D-MA), chair and ranking member of the House Ways and Means Committee, respectively, describes four provisions in SECURE 2.0 with problematic language.

1.           Startup tax credit for small employers adopting new retirement plans

2.           Change in the required minimum distribution (RMD) age from 73 to 75

3.           SIMPLE IRA and SEP plan Roth Accounts

4.           Requirement that catch-up contributions be made on a Roth basis for high earners

Startup Tax Credits for Small Employers

Section 102 of SECURE 2.0 provides for two tax-credit enhancements for small businesses who adopt new retirement plans, beginning in 2023.

First, for employers with 50 employees or fewer, the pension plan startup tax credit increases from 50% of qualified startup costs to 100%, with a maximum allowable credit of $5,000 per year for the first three years the plan is in effect.

Second, the Act offers a new tax credit for employer contributions to employee accounts for the first five tax years of the plan’s existence. The amount of the credit is a maximum of $1,000 for each participant earning not more than $100,000 in income (adjusted for inflation). Each year, a specific percentage applies, decreasing from 100% to 25%. The credit is reduced for employers with 51 to 100 employees; no credit is available for those with more than 100 employees.

In the letter, the authors note, “The provision could be read to subject the additional credit for employer contributions to the dollar limit that otherwise applies to the startup credit. However, Congress intended the new credit for employer contributions to be in addition to the startup credit otherwise available to the employer.”

Change in RMD Age

Numerous observers have noted that a technical correction is needed for Section 107 of the Act, which raised the RMD age from 72 to 73 beginning this year, and then again to 75 in 2033. The letter’s authors noted that the intention was to increase the age to 73 for those who reach age 72 after December 31, 2022, and to 75 for those who reach age 73 after December 31, 2032. However, as written, the provision could be misinterpreted to mean the age-75 rule applies to those who reach age 74 after December 31, 2032.

SIMPLE IRA and SEP Roth Accounts

Section 601 of the Act permits SIMPLE IRAs and Simplified Employee Pension plans to include a Roth IRA. As written, a reader might interpret the provision to mean that SEP and SIMPLE IRA contributions must be included when determining annual Roth IRA contribution limits. As the letter explains, “Congress intended that no contributions to a SIMPLE IRA or SEP plan (including Roth contributions) be taken into account for purposes of the otherwise applicable Roth IRA contribution limit.”

Roth Catch-up Contributions for High Earners

Addressing what the American Retirement Association called a “significant technical error” in Section 603, the letter clarified a rule surrounding catch-up contributions for high earners. Specifically, the rule’s intent was to require catch-up contributions for those earning more than $145,000 to be made on an after-tax, Roth basis beginning in 2024; however, language in a “conforming change” detailed in the provision could be interpreted to effectively eliminate the ability for all participants to make any catch-up contributions.

The congressmen’s letter clarified that, “Congress did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in plans of unrelated employers. Rather, Congress’s intent was to require catch-up contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pre-tax or Roth basis.”

No time frame given.

Although the letter provided no specific time period for introducing the corrective legislation, it did indicate that such legislation may also include additional items. Stay tuned!

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The SECURE 2.0 legislation included in the $1.7 trillion appropriations bill passed late last year builds on changes established by the original Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) enacted in 2019. SECURE 2.0 includes significant changes to the rules that apply to required minimum distributions from IRAs and employer retirement plans. Here’s what you need to know.

What Are Required Minimum Distributions (RMDs)?

Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age, or in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator, a tax professional, or your financial adviser.

Here is a brief overview of the top five ways that the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Prior to passage of the SECURE 1.0 legislation in 2019, RMDs were generally required to start after reaching age 70½. The 2019 legislation changed the required starting age to 72 for those who had not yet reached age 70½ before January 1, 2020.

SECURE 2.0 raises the trigger age for required minimum distributions to age 73 for those who reach age 72 after 2022. It increases the age again, to age 75, starting in 2033. So, here’s when you have to start taking RMDs based on your date of birth:

Your first required minimum distribution is for the year that you reach the age specified in the chart, and generally must be taken by April 1 of the year following the year that you reached that age. Subsequent required distributions must be taken by the end of each calendar year (so if you wait until April 1 of the year after you attain your required beginning age, you’ll have to take two required distributions during that calendar year). If you continue working past your required beginning age, you may delay RMDs from your current employer’s retirement plan until after you retire.

2. RMD Penalty Tax Decreased

The penalty for failing to take a required minimum distribution is steep — historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.

SECURE 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year (still steep, but better than 50%).

Also, effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.

3. Lifetime Required Minimum Distributions from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime Required Minimum Distributions. That is, a Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. Distributions to beneficiaries are required after the Roth IRA owner’s death, however.

The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts upon reaching their RMD age or avoid the requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.

Beginning in 2024, the SECURE 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who had already commenced lifetime RMDs. Any lifetime RMD from a Roth employer account attributable to 2023, but payable in 2024, is still required.

4. Additional Option for Spouse Beneficiaries of Employer Plans

The SECURE 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before required minimum distributions have commenced.

This provision will permit a surviving spouse to elect to be treated as the employee, similar to the already existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. This will generally allow a surviving spouse the option to delay the start of required minimum distributions until the deceased employee would have reached the appropriate RMD age, or until the surviving spouse reaches the appropriate RMD age, whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.

5. New Flexibility Regarding Annuity Options

Starting in 2023, the SECURE 2.0 legislation makes specific changes to the required minimum distribution rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:

• Annuity payments that increase by a constant percentage, provided certain requirements are met
• Lump-sum payment options that shorten the annuity payment period
• Acceleration of annuity payments payable over the ensuing 12 months
• Payments in the nature of dividends
• A final payment upon death that does not exceed premiums paid less total distributions made

It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty.

These are just a few of the many provisions in the SECURE 2.0 legislation. The rules regarding required minimum distributions are complicated. While the changes described here provide significant benefit to individuals, the rules remain difficult to navigate, and you should consult with a tax professional or your financial adviser to discuss your individual situation.

Footnotes:

1. A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the required minimum distribution rule. As currently written, it is unclear what the correct starting age is for an individual born in 1959 who reaches age 73 in the year 2032.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

You may donate money to charitable organizations throughout the year, for no other reason than your heart-felt desire to support causes that you care about. But if philanthropy is important to you, keep in mind that the associated tax breaks could potentially increase your ability to give. You might consider a more strategic approach to charitable giving, possibly as part of your year-end tax planning.

You can generally deduct charitable contributions, which reduces your taxable income, only if you itemize deductions on your federal income tax return. The deduction is currently limited to 60% of your adjusted gross income (AGI) for cash contributions to public charities. Otherwise, limits of 50%, 30%, or 20% of AGI may apply, depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.

If you claim a charitable deduction for a contribution of cash, a check, or other monetary gift, you should maintain a record such as a cancelled check, a bank statement, or a receipt or letter from the charity showing the name of the charitable organization and the date and amount of the contribution. Donations of $250 or more must be substantiated with a contemporaneous written acknowledgment from the charity. Additional requirements apply to noncash contributions.

Here are some strategies that may help enhance your charitable impact as well as your tax savings.

Bunch or time gifts and deductions

The Tax Cuts and Jobs Act roughly doubled the standard deduction beginning in 2018 and indexed it annually for inflation through 2025 ($12,950 for single taxpayers and $25,900 for joint filers in 2022). The result was a dramatic reduction in the number of taxpayers who itemize, now only about one out of ten.¹

If you find that the total of your itemized deductions for 2022 will be slightly below the level of the standard deduction, it could be worthwhile to combine or “bunch” 2022 and 2023 charitable contributions into one year, itemize on your 2022 tax return, and take the standard deduction on 2023 taxes.

Another option is to increase your charitable giving in years when you expect higher annual income. For example, charitable deductions could help offset the tax liability resulting from a business sale, capital gains, stock options, or a Roth IRA conversion.

Utilize a donor-advised fund

Another way to bunch contributions or generate a large charitable deduction for the current year — possibly before you know where you want the money to go — is to open a charitable account called a donor-advised fund (DAF). Donors who itemize deductions on their federal income tax returns can write off DAF contributions in the year they are made, then gift funds later to the charities they want to support. DAF contributions are irrevocable, which means the donor gives the sponsor legal control while retaining advisory privileges with respect to the distribution of funds and the investment of assets. DAFs have fees and expenses that donors giving directly to a charity would not face. (Note: BFSG can assist you with opening a DAF.)

Donate from an IRA

If you are an IRA owner who is 70½ or older, you can give to charity without itemizing and still get a tax break through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (generally, distributions from traditional IRAs are subject to federal income tax). QCDs are excluded from income and won’t affect your tax obligation. Moreover, once you reach age 72, a QCD can satisfy all or part of your required minimum distribution. To make a QCD, you would direct your IRA trustee to issue a check made out to a qualified public charity. You may contribute up to $100,000 from your IRA; if you’re married, your spouse may also contribute up to $100,000 from his or her IRA.

Consider a charitable trust

With a charitable remainder trust (CRT), you can donate money, securities, property, or other assets to the trust and designate a beneficiary — even yourself — to receive the income. Upon your death (or the death of your surviving spouse or designated beneficiary), the assets in the trust go to the charity.

Although the annual trust income is usually taxable, you may qualify for an income tax deduction based on the estimated present value of the remainder interest. Once assets are in the trust, the trustee may be able to sell them and reinvest the proceeds without incurring capital gains taxes.

Assets placed in a charitable lead trust (CLT) pay income to the designated charity until the trust ends (typically, upon your death). The remaining assets would then be returned to your heirs. This strategy might help reduce estate and gift taxes on appreciated assets that go to your heirs.

Both types of trusts are irrevocable, so assets cannot be removed from the trusts once they are donated. Not all charities are able to accept all possible gifts, so it would be prudent to check with your chosen organization in advance. Trusts incur upfront costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of experienced estate planning, legal, and tax professionals before implementing trust strategies.

Strive for effective giving

With so many nonprofit organizations seeking financial support, you may want to direct your money where it can do the most good. Here’s how you can help ensure that your donations are well spent.

Give directly to the charity.

Individuals who call on the phone or knock on your door are likely to be paid fundraisers, which can cut into the organization’s proceeds. Even worse, they could be questionable groups posing as more reputable and well-known charities. When contacted by fundraisers, never give out personal information over the phone or in response to an email you didn’t initiate. There’s no rush — take time to vet the charity before you donate.

Check out the charity’s track record.

There are several well-known “watchdogs” — such as CharityNavigator.org, GuideStar.org, and CharityWatch.org — that rate and review nonprofits. These organizations provide information that can help you evaluate charities and make wise choices. Find out how your gift might be used by looking into the charity’s mission, plans, and financial status. Charities with higher-than-normal administrative costs may not be spending enough on programs and services — or they could be in financial trouble.

Take advantage of “leverage” opportunities.

A wealthy benefactor or corporation may offer to match private donations to a charity during a certain window of time, and some employers have charitable giving programs that match funds donated by employees to qualifying organizations.

Sources:

1.  Internal Revenue Service, 2022

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

I am under the firm belief that as long as the IRS exists, we have job security. Trying to understand and interpret the IRS feels akin to reading hieroglyphics with no formal training. Often the IRS will create a new rule, but it generally takes time for them to interpret and clarify the ruling. We have seen this occur with rules around how individuals are required to take money out of inherited retirement accounts (i.e., IRA or 401k).

The IRS recently released Notice 2022-53 that provides guidance relative to certain required minimum distribution (RMD) rules enacted by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The notice also announced that the Department of the Treasury and the IRS will issue final RMD regulations effective no earlier than the 2023 distribution calendar year which, to date, have not been released in final form.

Once the final RMD regulations are effective, these changes will impact many individuals starting in 2023.

Elimination of the “Stretch IRA”

Before 2020, individuals that inherited a retirement account like an IRA or 401(k) had to take RMDs each year based on their life expectancy. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred to as the “stretch IRA” rule. The SECURE Act of 2019 changed the rules for those that inherited IRAs and required that the money be taken out within ten years of the date of death of the original account owner. Many professionals assumed this meant that no money was required to be taken out of the inherited retirement accounts from 2020 until the 10^th year. Until recently, the IRS did not provide any guidance for inherited retirement account RMDs.

What Will Change 

Starting in 2023, under new IRS guidance, owners of inherited accounts may be required to take an RMD from their inherited IRA depending on the age of the original owner at the date of their death. For example, Lauren inherited an IRA from her mother who was 73 years old when she passed away in 2021. Starting in 2023, Lauren will be required to make distributions from the inherited IRA based on her life expectancy. Since the IRS has not provided any past guidance, there will not be any requirements or penalties for not making distributions in 2021 or 2022. Below is a flow chart to help understand if you need to start distributions from the inherited retirement accounts.

What Needs to Be Done Starting 2023

If you have an inherited IRA or inherited retirement plan that was opened 2020 or later, you will need to review if the original account owner was 72 or older when he/she passed away. If they were 72 or older you will be required to begin to take distributions. Speak with your advisor or custodian (i.e., Schwab or Fidelity) in early 2023 to learn more about how much you will need to withdraw to be compliant with the new IRS guidelines.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.