What You Need to Know
- The new proposed RMD regs took something that was getting simplified and made it more complex, Slott said.
- The 10-year rule is the biggest surprise.
- The regs also create a “bizarre” new RMD term, Slott says.
The Internal Revenue Service’s recently released proposed regulations about how to handle required minimum distributions under the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 are a retirement planning nightmare, according to IRA and tax planning expert Ed Slott of Ed Slott & Co.
The 10-year rule under Secure, which was passed at the end of 2019, establishes a 10-year time period for the “full” distribution of an inherited IRA, but only for deaths occurring after 2019 and not for all beneficiaries.
The new proposed regs turn the 10-year rule into a “retirement planning nightmare for both advisors and clients!” Slott told ThinkAdvisor Monday in an email.
The IRS proposal “took something that was actually getting somewhat simplified and made it much more complex,” Slott said.
Right now, he continued, “we are rewriting all of our advisor IRA training and workshop manuals, and inserting all of these new provisions. It’s now a real mishmash of complexity, combining some old rules (which we thought no longer applied) with new ones.”
As Slott explained in a previous interview with ThinkAdvisor, the Secure Act “left many open questions” when it was enacted in 2020.
After more than two years, “these proposed regulations provide our first glimpse into the answers to most of the open RMD questions” after the Secure Act, Slott said.
“I really don’t know how advisors will be able to explain this all to clients, especially right after they have spent two years learning the Secure Act rules, explaining them to affected clients and then doing planning based on how they believed the post-death RMD rules would work,” Slott said Monday. “There are even added rules that affect 90 +-year-olds.”
The real problem: “these provisions affect virtually everyone with a retirement account, IRAs, 401(k)s, everything, and the penalties for missing an RMD are 50%.”
Th new “labyrinth of confusing rules,” Slott continued, “will fall not only on the clients in setting up their IRA estate plans but specifically on their beneficiaries who first must figure out — what kind of beneficiary am I?”
Even thornier: “When a trust is the beneficiary, which affects many clients with large IRAs, who tend to leave those IRAs to trusts,” Slott said. “These trusts will now have to be reviewed to see if they will still hold up and meet the client’s intended estate plan. They probably won’t.”
Under the Secure Act, Slott explains, when a beneficiary inherits they can fall into one of three groups:
1. Non-designated beneficiary (NDB) not a person.
Examples are an estate, charity or non-qualifying trust.
“These rules have not changed but this is the worst category of beneficiary, for RMD payout purposes,” Slott said. “This generally applies when a person neglects to name a beneficiary or a beneficiary has died, and the beneficiary form was not updated.”
2. Designated beneficiary — but not an EDB.
These are beneficiaries who will no longer qualify for the stretch IRA (most older children, grandchildren and other non-spouse beneficiaries) and will end up with the 10-year rule (all inherited funds must be withdrawn by the end of the 10th year after death).
3. Eligible designated beneficiary (EDB).
These are surviving spouses and a few other beneficiary categories:
- Minor children of the deceased IRA owner (up to age 21, regardless of state law), but not grandchildren;
- Disabled or chronically ill beneficiaries; and
- Beneficiaries who are not more than 10 years younger than the deceased IRA owner.
These EDBs still qualify for the stretch IRA.
Biggest Surprise: The 10-Year Rule
The biggest surprise under the new IRS RMD proposed regs “is their interpretation of the 10-year rule,” Slott continued.