Reviewing the Latest SECURE Act Proposed Regulations
Key Points – Review the Latest SECURE Act Proposed Regulations
- What’s New with the SECURE Act?
- Providing Essential Clarity on Eligible Designated Beneficiaries and See-Through Trust Rules
- A Not-So-Welcomed Change with the 10-Year Rule and Annual RMDs
- How the SECURE Act Proposed Regulations Involve Spousal Rollover with RMDs
- Some Much Needed Relief on Missed RMDs
- 5 Minutes to Read
What’s New with the SECURE Act?
Whether it be the ever-evolving geopolitical turmoil, the Federal Reserve raising interest rates, or the market volatility that has been tied to both, there has been a lot to monitor from a financial perspective in recent months. We’ve always emphasized to clients and prospective clients that all it takes it one small mistake to derail your retirement, so it makes it that much more important to have a comprehensive financial plan in place to ensure that you have clarity and confidence needed to achieve your retirement goals.
That being said, it’s our responsibility to also make sure that there’s nothing that falls through the cracks within anyone’s retirement plan. When the SECURE Act was signed into law in December 2019, we made it a priority to familiarize ourselves with it and its impacts on retirees. Well, amid all that has been going on in the financial world this year, there have also been some proposed regulations on the SECURE Act by the IRS. These proposals could impact Required Minimum Distributions for 2022 and beyond.
What Is the SECURE Act?
Before we get into the proposed regulations, let’s do a quick review of the SECURE Act. The SECURE Act stands for the Setting Every Community Up for Retirement Enhancement Act of 2019. There have been components of the SECURE Act that have had retirees smiling from ear to ear (the postponement of RMDs from 70.5 to 72). And there have been some unpleasant aspects of the SECURE Act (severely limiting Stretch IRAs). Prior to the SECURE Act, a non-spouse beneficiary could take RMDs from the inherited IRA over their lifetime if the IRA owner died and left it to them.
Due to Stretch IRAs restrictions, most beneficiaries are now required to withdraw the totality of inherited IRAs within 10 years of inheriting it. The fallout from that has resulted in accelerating income taxes and additional income being taxed at higher rates for several beneficiaries.
We could go on and on about other immediate impacts that the SECURE Act has had on retirees since it was signed into law, but let’s get to the IRS’s SECURE Act proposed regulations that were just introduced in February. These proposed regulations could end up looking a little bit different by the time they’re finalized, but they offer some insight into the IRS’s ideology.
Breaking Down the SECURE Act Proposed Regulations into Five Categories
Our CEO and Founder Dean Barber has been fortunate to study with some of the brightest minds in the financial industry. We’re going to pick the brain of one of those minds, as Ed Slott and his team broke down these SECURE Act proposed regulations into five categories1. Those include eligible designated beneficiaries, trusts, annual RMDs and the 10-year rule, spousal rollover, and 50% penalty relief.
Clarity on Who Qualifies as Eligible Designated Beneficiaries
While we covered earlier how the SECURE Act has severely limited Stretch IRAs, eligible designated beneficiaries have still been able to benefit from them. Prior to the SECURE Act’s proposed regulations, there was some gray area on who exactly qualified as an EDB. The proposed regulations outlined that an IRA owner’s child can remain an EDB until turning 212. This applies for trusts as well (more on those shortly). What’s more, the proposed regulations offered clarification on what disabilities can lead to a person qualifying as an EDB. There is new documentation needed for the people in that realm to ensure that they can benefit from Stretch IRAs.
What’s the Latest on See-Through Trusts Rules?
Speaking of much-needed clarification, the guidelines for trusts as beneficiaries of IRAs were in doubt following the implementation of the SECURE Act. Thankfully, these proposed regulations would bring back the previous rules, including those for see-through trusts. The beneficiaries of the trust will qualify as designated beneficiaries if the trust stays within the see-through guidelines.
Even before the SECURE Act, there were countless questions about trusts that were raised in private letter rulings. Those issues persist, but these SECURE Act proposed regulations could help answer when beneficiaries can forgo identifying the following:
- RMD payments
- Impact of Powers of Appointments
- State Laws that Allow Terms of a Trust to Be Altered After Death
A Big Change with the 10-Year Rule and Annual RMDs
This is one of the more unexpected revelations in the 275 pages of the IRS’s SECURE Act proposed regulations. They have a bit of a new stance on the 10-year rule3 that we mentioned earlier.
Should the IRA owner pass away prior to their required beginning date, the 10-year rule only mandates that the totality of the account be drained by December 31 of the 10th year after the year of their passing. Say goodbye to annual RMDs.
Despite that change, though, the SECURE Act proposed regulations state that if the account owner passes away following the required beginning date, the annual RMDs are mandatory in Years 1 through 9 and the 10-year rule still comes into play.
A New Guideline for Spousal Rollovers
Next up in the SECURE Act proposed regulations are a new guideline for spousal rollovers. This new rule centers around spouse beneficiaries who try to utilize the new 10-year rule to postpone RMDs. This guideline mandates that hypothetical missed RMDs be taken in certain situations when a spousal rollover takes place.
Some Much Needed Relief on Missed RMDs
The last of these five primary SECURE Act proposed regulations involves a 50% penalty that comes into effect with missed RMDs. Let’s say that the account owner was obligated to take an RMD during the year they passed away, but didn’t take it before passing. Well, that responsibility now falls on the beneficiaries, as they take on a 50% penalty if the RMD is missed.
That can create a tough situation if the account owner passes away late in the year. That’s where this SECURE Act proposed regulation with providing relief on the 50% penalty relief via an automatic waiver if the RMD is missed. If the beneficiary takes the year of death RMD prior to the tax-filing deadline, they can utilize the waiver.
Do You Have Questions About These SECURE Act Proposed Regulations?
Some of these SECURE Act proposed regulations could bring some excitement for retirees, while others could cause concern. Either way, it’s critical to have a good comprehension of how the potential changes could specifically impact you.
If you have any questions about the SECURE Act proposed regulations, please reach out to us. You can schedule a complimentary consultation or 20-minute ask anything session with one of our CERTIFIED FINANCIAL PLANNER™ professionals to get the clarity that all retirees need on this topic. We can meet with you in person, virtually, or by phone to discuss all your questions on these proposals.
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1Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, February 28, 2022, with permission. https://www.irahelp.com/slottreport/secure-act-regulations-are-here?utm_source=feedburner&utm_medium=email Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
2Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, March 2, 2022, with permission. https://www.irahelp.com/slottreport/age-majority-and-new-secure-act-regulations?utm_source=feedburner&utm_medium=email Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
3Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, March 7, 2022, with permission. https://www.irahelp.com/slottreport/most-controversial-part-new-irs-regulations?utm_source=feedburner&utm_medium=email Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.