The IRS has been active in clarifying the implications of the SECURE Act and SECURE Act 2.0 regarding required minimum distributions (RMDs) while also addressing common questions and gaps in understanding. Although much discussion centers on the end of the Stretch IRA and the associated 10-year rule, these laws cover a broader range of topics. The recent regulations provide numerous clarifications, particularly in response to legislative changes affecting RMD starting ages, which have shifted from 72 to 73 and now to 75 based on one’s birth year. Specifically, the IRS has corrected a discrepancy that affected individuals born in 1959, affirming that their RMD age is 73 across the relevant tax code sections.
One important clarification made by the IRS pertains to how beneficiaries handle RMDs upon the account owner’s death. Consistent with prior rules, the RMD must still be taken in the year of the owner’s death. If the original account holder has not made their RMD prior to passing, the beneficiaries are responsible for completing this requirement using the same life expectancy schedule used by the deceased owner. The amount taken will be included in the gross income of the beneficiary, thereby ensuring that the tax implications are clear even in the context of beneficiary distributions.
Another significant area addressed in the new regulations involves the treatment of retirement accounts that hold annuities. When an account owner has both annuity and non-annuity portions within their retirement account, they need not calculate RMDs separately from each portion. Instead, the total RMD can be satisfied from either the annuity or non-annuity portions, reflecting a more streamlined approach. Furthermore, any distributions from the annuity that the account owner receives will automatically count towards fulfilling that year’s RMD requirement.
The regulations have also harmonized the treatment of Roth accounts. Previously, owners of Roth 401(k)s faced lifetime RMDs, in contrast to Roth IRAs, which did not mandate RMDs. The SECURE Act 2.0 has eliminated this discrepancy, ensuring that Roth 401(k) account owners, like their Roth IRA counterparts, are exempt from RMDs during their lifetimes. This adjustment simplifies the financial planning landscape for individuals with both traditional and Roth 401(k) accounts, as balances in Roth accounts no longer factor into the RMD calculations for traditional accounts, preserving the tax efficiencies associated with Roth accounts.
For individuals who have yet to retire but are approaching RMD age, an important transition occurs in the year they leave employment. Although RMDs are required when reaching the designated age, if an individual is still employed, they can delay RMDs from their current employer’s 401(k) until retirement. However, upon retirement, they must take the RMD for that year before rolling over any remaining traditional 401(k) balance into an IRA. In contrast, the entire balance of a Roth 401(k) can be rolled over tax-free to a Roth IRA without triggering any RMD requirement.
Finally, the new regulations introduce flexibility regarding qualified longevity annuity contracts (QLACs) within IRAs. Under the new rules, individuals can roll over funds between QLACs within their IRAs without facing adverse tax consequences. This change provides account owners with the opportunity to reassess and potentially realign their investments in QLACs without being penalized, ensuring they can optimize their retirement income strategies without fear of tax liabilities from unwanted transactions. Overall, these clarifications offer more comprehensive guidance for retirement planning under the updated SECURE framework.
