Secure Act/Secure Act 2.0

Which beneficiaries can still stretch their inherited IRAs?

Eligible designated beneficiaries (EDBs) -- 5 classes:

1. Surviving spouse

2. Minor children, up to the age of majority (age 21 - regardless of state law - Per IRS Regs. released on 2-23-22) -- but not grandchildren

3. Disabled individuals -- under the strict IRS rules

4. Chronically ill individuals

5. Individuals not more than 10 years younger than the IRA owner

Effective date: For deaths after 2019. For deaths in 2019 or prior years, the pre-SECURE Act "stretch IRA" rules would still apply

Could require RMDs for years 1-9, if death is after the required beginning date.

The balance would have to be withdrawn by the end of the 10 years after death.

Waives the 50% penalty on missed 2021 and 2022 inherited retirement RMDs within the 10-year payout rule.

2023 Effect: These missed RMDs do not have to be made up when calculating 2023 RMD amounts.

Which accounts are not affected?

- IRAs and company plan accounts that are paying lifetime RMDs

- IRAs and company plan accounts inherited by EDBs who are stretching RMD payments

- IRAs and company plan accounts inherited prior to the SECURE Act (i.e. grandfathered stretch payments)

- Inherited Roth IRAs (Roth IRA owners are deemed to die before their RBD, so no RMDs ever apply in years 1-9 of the 10 year period)

At Least as Rapidly Rule (ALAR)

Per IRS proposed regulations -- When death occurs On or After the RBD (required beginning date) -- ALAR applies -- According to the IRS, once RMDs begin, they can not be turned off. They must continue. 

Translation: Both rules apply when death is on or after the RBD

1. The "at least as rapidly" rules which requires RMDs each year after death

2. The 10-year-rule--where all funds int eh inherited IRA must be withdrawn by the end of the 10th year after death.

RMDs will be required for years 1-9, and the balance must be withdrawn by the end of the 10-year term!

- Increase in RMD Age to 73 (in 2023), then to 75 (in 2023)

- Which RMD age to use?

   Age 72 = Born 1950 or earlier

   Age 73 = Born 1951 - 1959

   Age 75 = Born 1960 or later

- Reduced the RMD penalty from 50% to 25% and 10% if timely corrected by making up the missed RMD

- Eliminated Roth 401(k) RMDs

- Beginning in 2024, Roth 401(k)s will no longer be subject to lifetime RMDs

- Roth IRAs were never subject to lifetime RMDs, and now employer plans will have that same benefit.

- Expanded 10% penalty exceptions for early withdrawals

- No 10% Penalty on Removing Excess IRA Contributions

When an excess contribution along with an NIA (net income attributable) is timely withdrawn, the excess itself is not taxable or subject to a penalty (i.e. no 6% excess contribution or 10% early distribution penalties apply). However, the NIA is taxable for the year of the excess contribution, not the year of the distribution.

Under SECURE 2.0, the NIA is no longer subject to the 10% early distribution penalty if the individual is under age 59.5. 

- Expanded 10% penalty exceptions for early withdrawals

Public Safety Employees

Age 50 exception for early withdrawals from company plans -- will now include more public safety workers.

The law extended the age 50 public safety exception to private sector firefighters and corrections officers who are employees of state and local governments. It also modified the penalty exception to apply upon the lesser of age 50 or 25 years of service.

- $1,000 IRA catch-up contribution amount (for those age 50 or over) will be indexed for inflation increases beginning in 2024, in $100 increments

- Student loan repayments can qualify for matching 401(k) contributions

- Rollovers from 529 plans to Roth IRAs -- limited to $35,000

     - Must go to beneficiary's Roth IRA

     - 529 must have been in existence for 15 years

     - 529 contributions made in the last 5 years don't qualify

     - Limited to annual IRA contribution amounts (can not use the full $35,000 in one year)

Expanded Roth options, for IRAs and Plans

- SEP and SIMPLE Roth IRAs

- Matching contributions can go to the Roth 401(k)

- Plan catch-up contributions must go to Roth 401(k) -- if wages from the company for the prior year exceeds $145,000 (Effective in 2024)

- RMDs can not be converted to Roth IRAs (but Pre-RMDs can!)

Benefits of a Roth Conversion: Reasons to Convert

- Pay taxes once, and never again

- Tax Insurance: A Roth conversion locks in today's low tax rates

     - How much can be converted at the lowest tax rates?

- Roth IRAs remove the uncertainty of what future tax rates might be.

- If future tax rates increase, tax-free Roth IRA income will be more valuable.

Roth IRA exception - no RMDs for years 1-9, since all Roth IRA owners are deemed to have died before the RBD (regardless of their age of death). However, all inherited Roth funds must still be withdrawn by the end of the 10-year term.

Roth conversions can avoid high trust taxes for heirs if a trust is the IRA beneficiary

- Post-death distributions to the trust are tax-free

- SECURE Act -- Most trusts will be subject to the 10-year payout rule after death. However, the inherited Roth funds paid out to the trust can be held and protected in the trust, even after the 10 years.