PROPOSED SECURE ACT REGULATIONS
The SECURE Act, signed into law in December 2019, made significant changes to the most popular retirement plans used in the United States. However, much of the statutory language was ambiguous and open to IRS interpretation.
Advisers and attorneys in many cases could only guess how the IRS would interpret the ambiguous provisions. Until the IRS issued final regulations, beneficiaries could not be sure of the procedures to be followed.
The IRS issued proposed regulations for the SECURE Act on Feb. 23. These regulations are applicable for RMDs scheduled for 2022. The IRS is accepting comments, and hearings are scheduled in June. After their conclusion, the IRS will issue its formal regulations.
Even though the proposed regulations are not yet finalized, you should be familiar with them if you expect to be affected. To access the proposed regulations, type “Federal Register: Required Minimum Distributions” into a search engine. What your search will turn up is 275 pages of proposed regulations, so you may want to ask your financial adviser or attorney (if a trust is involved) to review these proposed
regulations. Here are some highlights:
Eligible designated beneficiaries (EDBs): A minor child is considered to be an EDB if the child has not reached his/her 21st birthday. This is important because an EDB is able to use the “stretch” option for taking distributions, based on life expectancy, which is longer than the 10-year rule that will be in effect for other beneficiaries. The regulations also provide guidance for others who qualify as EDBs, such as those who are considered disabled, particularly for beneficiaries under age
18. New documentation will be required for those categorized as ill and disabled in order to qualify for the stretch option.
Beneficiaries subject to the 10-year rule:
If the account owner died before his/her required beginning date, then no RMD is required, and the beneficiary is required to withdraw all funds from the IRA account by Dec. 31 of the 10th year following the year of death. However, RMDs will be required if the IRA owner dies after his/ her required beginning date. RMDs will be required for years one through nine starting the year after the owner’s death.
Spousal rollover: A new rule specifies that “hypothetical missed RMDs” are to be taken in some circumstances. This rule is obviously intended to prevent beneficiaries from postponing required RMDs.
50% penalty relief: When an IRA owner dies before taking all the required RMDs in the year of death, the beneficiary is required to take the RMD deficiency out of the account.
The proposed regulation provides a waiver of the 50% penalty if the beneficiary takes the year-of-death RMD by the filing deadline, including extensions.
Trust issues: The proposed regulations include revised rules applicable to beneficiaries of trusts, such as rules for “look-through” trusts. As long as the trust satisfies the look-through rules, the beneficiaries are considered designated beneficiaries. Beneficiaries are subject to the 10-year rule.
The regulations covered issues related to private letter rulings. For example, the regulations encompass when beneficiaries are not required to make RMD payments, the impact of powers of appointment, and state laws that permit the terms of a trust to be modified after death.
Also covered are issues related to disabled or chronically ill individuals. For these beneficiaries, the stretch option is available even if the trust includes other beneficiaries.
Reference is made to minor children of the account owner, who still qualify for the stretch option — even if other beneficiaries are included as trust beneficiaries, who are considered non-EDB beneficiaries. Non-EDB beneficiaries are required to use the 10-year rule.