#secureact

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.

By:  Henry VanBuskirk, CFP®, Wealth Manager

The current rule states that you must take your first Required Minimum Distribution (RMD) by April 1^st of the year after you reach 72 and annually thereafter by December 31^st of each year. When the SECURE Act became law on December 20, 2019, the RMD age was pushed back from age 70.5 to age 72. 

Plans affected by RMD rules are: 401(k) plans, 403(b) Plans, 457 Plans, Traditional IRAs, SEP IRAs, SIMPLE IRAs, Inherited IRAs and Inherited Roth IRAs. Defined Benefit and Cash Balance plans satisfy their RMDs by starting monthly benefit payments (or a lump sum distribution) at the participant’s required beginning date.

If you’re still employed by the plan sponsor of a 401(k) and are not considered to be a more than 5% owner, your plan may allow you to delay RMDs until you retire. The delay in starting RMDs does not extend to owners of traditional IRAs, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and SARSEP IRA plans.

The RMD value is calculated based on the qualified investment account’s value on December 31^st of the prior year and is based on standardized IRS guidelines (i.e., the RMD for 2022 is based on the value of the account on 12/31/2021). The prior year’s year-end balance is divided by a life expectancy factor issued by the IRS.

 If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).

For inherited IRAs and inherited Roth IRAs, if the account was inherited before the SECURE Act was passed, you can take RMDs over your life expectancy. If you inherited the account after the SECURE Act was passed, there are no required annual distributions, but the account must be depleted within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child until they reach the age of majority. 

Now let’s take a look at the options available to you for your IRA, 401(k), or another qualified investment account subject to RMD rules.

Option 1 – Take your RMD.

This is the most straightforward option. You can take your RMD (or a greater amount if needed), withhold the appropriate federal and state taxes from the distribution, and use the net distribution as needed. If this is your first year taking your RMD, you can take two RMDs in the first required year. This is because the rules say by April 1^st following the year you turn 72. Therefore, you could take your 2022 RMD on February 15, 2023, and your 2023 RMD on June 30, 2023. Doing this would allow you to delay the first year’s RMD for tax purposes for only the first year and means that the 2022 RMD wouldn’t affect your 2022 tax return. However, Uncle Sam will eventually get his recompense and your 2023 tax return would reflect your 2022 RMD and 2023 RMD with this strategy. Note that RMDs are taxed at ordinary income rates.

Option 2 – Don’t take your RMD.

Please don’t go with this option. The IRS has a very steep penalty for those who don’t take their RMD.  The IRS penalty is 50% of the amount not taken on time.  In general, even if you don’t need the money.  You really should take it.  As you will see later, there are many options available to you even if you don’t need the money.

Option 3 – Take your RMD and invest those proceeds into a non-qualified investment account.

With this option, you would take the RMD as normal and withhold federal and state taxes and invest the net distribution into a non-qualified (taxable) investment account. The non-qualified account could be used for general savings to be used during your lifetime, an inheritance to gift to your beneficiaries after your death, or to help save for a future unexpected expense like a long-term care need.

Option 4 – Qualified Longevity Annuity Contract (QLAC).

A QLAC is a strategy where you put in the lesser of 25% of the total value of all your qualified investment accounts or $145,000. A QLAC allows you to fund an annuity contract as early as age 65 and delay income received from the annuity until age 85. The QLAC itself does not count towards the RMD calculation, but the income received from QLAC is treated as ordinary income. This sounds like the slam dunk option, right? Wrong. The answer is it depends on your unique situation (like most answers in financial planning). Yes, a QLAC would help lower the tax bill during the years you defer taking income from the QLAC, at the cost of less net money in your pocket during the early years of your retirement and annuity payments that do not generally have a cost-of-living adjustment tied to them that would increase your tax bill because you still have RMDs on top of the QLAC payments. A QLAC is generally also an irrevocable decision. We would be happy to discuss the pros and cons of purchasing a QLAC if you have further questions.

Option 5 – Qualified Charitable Distribution (QCD).

For the altruist (who also likes not paying taxes), a QCD is an option. If there is a charity (a 501(c)(3) organization) that you feel passionate about, you can donate up to $100,000 per year (as of tax year 2022) directly from your qualified investment account to that charity tax-free. This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns. The key word is “directly”, as if you physically take the RMD check and then turn around and write a check to that charity, that does not count. For those over age 70.5, QCDs can be used before you are required to take your RMD at age 72. We can work with you to make sure that your QCD is done correctly.

Option 6 – College Planning.

Maybe you have a sizable estate and are concerned about making sure your grandchildren can attend college. With this option, you can put the net RMD funds into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses (i.e., tuition, books, room and board, etc.). Contributions to this investment account may even be tax-deductible in your state. Also, since this is considered a gift, you are lowering the size of your taxable estate, which could help your heirs at the time of your passing. Normally you are only allowed to gift $16,000 per year (or $32,000 per year if you elect gift splitting with your spouse) per beneficiary. But with a 529 plan, you can gift 5 years’ worth of gifts in only one year (“superfunding”).  This means that you could potentially gift $80,000 per beneficiary for a single tax filer or $160,000 per beneficiary for a married couple into the 529 plan and lower your taxable estate by that amount. There are a few moving parts in this example, including possibly filing a gift tax return, so we would need to work with you and possibly your accountant and estate planning attorney to make sure this would all go according to plan.

Now that we have an idea of the different options available to you, we would like to illustrate examples of how some of these options can be used in a real-world setting.

*If you have a QLAC, the calculations could differ, but the general idea of the flowchart would still be the same. 

The goal of this article was to illustrate that there are many different options available to you (including ones not illustrated in this article). Also, check out this 2-minute BFSG Short which gives a high-level overview of the most important things to know about RMDs. Our team is available to discuss these concepts with you in further depth if you have any other questions and to evaluate what option would be best for your unique situation.  

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.

As we approach the end of 2021, now is a good time to take a closer look to make sure you have satisfied your required minimum distributions (RMDs). Generally, RMDs must be taken by December 31 each year (Exception: RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company). Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.

Once you reach age 72, you are required to take minimum distributions from your traditional IRAs and most employer-sponsored retirement plans. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).

For those over age 70.5, Qualified Charitable Distributions (QCDs) can be used to satisfy all or part of your RMD (up to $100k). This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns.

The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.

Recognizing that life expectancies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period of time. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.

This year-end, more than most, will require some flexibility given the potentially material changes coming down the pike for income taxes. Consider speaking with your financial and tax professionals for additional tax planning.

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

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 web site 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 see important disclosure information here.

By:  Tina Schackman, CFA®, Senior Retirement Plan Consultant

The SECURE Act of 2019 provided some much needed legislation to help improve coverage in retirement plans, incentives for small businesses, and additional safe harbors for retirement plan fiduciaries. One area that deserves a closer look is the newly created Section 404(e) of ERISA which provides safe harbor relief for the selection of lifetime income providers. The safe harbor provision under the SECURE Act of 2019 (the “Act”) for defined contribution plans states a fiduciary must undergo an “objective, thorough, and analytical search” to identify a provider for a lifetime income product, but it does not release fiduciaries from all of the risks associated with choosing an income product for their plan. The safe harbor provides relief for the selection of the provider, not the product.

Retirement plan providers offering these products typically only have their own proprietary product on their platform, so what is the likelihood the lifetime income provider or product selected is always going to be with the plan’s current provider? Until retirement plan providers are willing to offer non-proprietary lifetime income products on their platforms, retirement plan fiduciaries are going to be held to a standard of ensuring the product available with their current provider is suitable for their participants, but possibly not the most appropriate product.   

In order for retirement plan fiduciaries to fulfill the requirements under the safe harbor relief, there are two requirements that must be met when selecting a lifetime income provider:

1) Verify the Provider Can Meet Their Financial Obligations:  A thorough review of the financial capability of the provider must be completed to verify the provider is financially capable of satisfying its obligations under the retirement income contract.  This review must be done at the time of selection, and reviewed periodically (e.g., annually). Under the safe harbor, as long as the plan fiduciaries receive written representations from the provider verifying proper licensing, ability to meet state requirements, and undergo routine financial examinations, they can be assured they’ve met this requirement.

2) Reasonableness of Costs Analysis:  Fiduciaries must determine the costs (including fees and commissions) are reasonable for the guaranteed retirement income contract offered by the provider in relation to the benefit and product features (referred to as the “income guarantee fee”).   The Act goes on to state there is NO requirement for a fiduciary to select the least expensive option.    When conducting this type of analysis, it is important to note the income guarantee fee, withdrawal rates, and risk/volatility of the underlying portfolio are all interconnected.  For example, the income guarantee fee is partially based on the cost of hedging the risk of the underlying portfolio, such as a balanced fund.  But if your provider’s income solution only offers a very conservative portfolio option, then the income guarantee fee could be expected to be lower than other products with more aggressive portfolios.  Alternatively, if the withdrawal rates are lower than other products, it could be argued the income guarantee fee shouldn’t be as high as alternative products.   All three of these factors should be considered when reviewing the reasonableness of costs (See Illustration A). 

Illustration A

What about portability?

Portability of these products at the plan level and for participants has been an area of concern for fiduciaries because it could have an impact on terminating employees and how the assets would be administered in the event of a termination of a service provider.  The Act helps resolve the issue of plan level portability by creating a new “distributable event” that applies to lifetime income products when they are no longer allowed as an investment option within a plan.  In such situations, participants will be allowed to distribute their income product in-kind to an IRA rollover product beginning 90 days prior to the elimination of the product as an investment option.  If a plan sponsor wants to change retirement plan providers and is not able to transfer the lifetime income product to the new provider, all of the lifetime income assets will be rolled into the previous provider’s IRA rollover product. However, this may make the existing plan less desirable to the new provider, and the income product may be more expensive to maintain for those participants wanting to keep the lifetime income benefit.

As retirement plan fiduciaries continue to explore lifetime income products, many questions may arise around how the distribution phase works, how account balances can continue to grow, how participants can take all their money out of these products, etc.   From our experience, the real concerns behind lifetime income products surface when participants begin to execute on the guarantee and draw down the income benefit.   Reasonableness of fees and the ability of the provider to fulfill their financial obligations are critical elements of the due diligence process, but it should also be noted there are other areas of potential fiduciary liability that shouldn’t be overlooked and do not have protection under the Act. 

BFSG has the expertise to conduct a thorough analysis of lifetime income products, so please contact us if you are interested in a lifetime income product for your retirement plan or you have an existing product and are interested in learning how to obtain safe harbor relief. 

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 web site 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 see important disclosure information here.