08.03.22

Webinar Recap: Changes Ahead: IRS Surprises With RMD Interpretation

by: BISA Staff

In February 2022, the IRS finally released long-awaited proposed regulations on the Setting Every Community Up for Retirement (SECURE) Act passed by Congress and signed into law more than 2 years ago.

Although these regulations are proposed and subject to change, they provide guidance and clarification on many of the new lifetime and post-death required minimum distribution (RMD) rules enacted by the SECURE Act. It may benefit you to know the key terms identified throughout the proposal to further understand, and plan for the regulations proposed.

On July 19, BISA hosted a webinar, Changes Ahead: IRS Surprises with RMD Interpretation, with speaker Laird Johnson, CLU®, ChFC®, senior director of advanced markets at Equitable Distributors, who summarized the findings from the IRS' proposed regulations that revise the existing required minimum distribution (RMD) regulations and other related regulations. Below is a high-level review of the webinar content.

Missed the live webinar? Watch the recording on demand. Access to BISA webinar recordings is complimentary for all BISA Members.

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Regulation vs. Proposed Regulation

Change in RBD Impacting RMD

The IRS has officially changed the required beginning date (RBD) – from the age of 70.5 to 72. This is the age at which an IRA owner, a 401k participant or a profit-sharing participant would typically have to start taking their RMD from their accounts. [SK1] The RBD age started at 70.5 dating back to the mid-1980s; however, as people are proven to live much longer than they did 40 years ago, Johnson asserted that it made sense that the RBD were to be moved back.

In addition to this age adjustment, the IRS also introduced the 10-year rule for certain IRA beneficiaries. The only requirement is that the account is officially liquidated after the 10th year of the death date of the account. This allows any fluid distribution between years 1-9, and after the 10th year, you must withdraw the entire balance of the IRA (by December 31), and then the account will be inactivated. 
-    EX: Death of IRA owner in 2022 would require full liquidation of the IRA by the beneficiary by end of 2032

Impact of RBD on IRA Beneficiaries Post-SECURE Act

Stretch Options for Non-EDB's

Questions That Will Determine Beneficiary Options:
When did our IRA owner pass away?
-    Pre-SECURE Act or Post-SECURE Act (2020)

How old was the IRA owner when they passed away?
-    Younger than 72 or older than 72

Stretch Rules for Eligible Designated Beneficiaries (EDB’s)

Designated Beneficiary: Any IRA-designated beneficiary who is not covered by the following:

1. Surviving Spouse
   1. Clarified spouse age for RMD – not required to take RMDs until decedent would have turned 72.
   2. If the surviving spouse beneficiary passes, the remainder beneficiary's RMDs are based on default to the original owner's age.
   3. EDB’s can opt out of lifetime payments and into the 10-year rule.
2. Minor Child
3. Disabled Individual
   1. Safe harbor for disability definition
   2. Minor disabled beneficiary
   3. Deadline of documentation for disability: October 31 of the year following year of death
   4. Does not define documentation requirements
4. Chronically Ill
   1. Deadline of documentation for chronic illness: October 31 of the year following year of death
   2. Defined in IRC Section 770B(c)(2) as unable to perform 2 or more activities of daily living for at least a "lengthy" period of time, as certified by a healthcare practictioner
5. Not more than 10 years younger than the deceased individual
6. Certain trusts that benefit the above

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Impact on Roth IRAs

• Annual RMDs from inherited Roth IRAs are not required for beneficiaries subject to the 10-year rule.
• An inherited Roth IRA has flexibility within the 10-year period and completely avoids the new post-RBD RMD rules 
• An inherited Roth IRA can grow tax-free for 10 years after death before any distributions are required.
• The implications of the proposed rules could mean more conversations to Roth IRAs moving forward.

Impact on Trust Beneficiary Rules

• Leave in place most "trust as beneficiary rules" from prior SECURE Act, including:
  • See-through trusts
  • Conduit and discretionary trusts
    • Conduit trust beneficiaries can be disregarded for RMD purposes
• New regulations provide abililty to disregard certain beneficiaries for:
  • Discretionary trusts
  • Secondarybeneficiaries who can only inherit contingent upon death of another secondary beneficiary
  • Beneficiaries set to receive distributions of retirement assets that are required to distribute to a minor before the end of the year that they turn 21

How This Impacts the Role of the Financial Advisor

The proposed regulations shared in February and elaborated on in the July webinar recording help to clarify the administration of inherited IRA and qualified plan (QP) assets. While it is important to remember that these changes are currently only proposed regulations, it gives a window to see what the IRS is moving toward – and, as Johnson shared, it is highly possible that finalized regulations will be shared by the end of 2022. This window provides an opportunity for financial advisors to review the trusts in their clients’ portfolios in advance of the final regulations being enacted. Proactive assessment and advice today will help build trust for tomorrow.