April 05, 2022
Update on the SECURE Act
The 10-year rule drama plays on
The Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act, became law in December 2019 and made major changes to the required minimum distribution (RMD) rules:
- RMD beginning date advanced to 72
- Contribution age limits eliminated for individual retirement accounts (IRAs)
- 2022 RMDs with new life expectancy tables
- Lifetime stretch for nonspousal beneficiaries eliminated (with few exceptions)
Perhaps one of the most significant changes was how the act would affect payouts for most nonspouse beneficiaries of IRAs and other retirement plans. Historically, nonspouse beneficiaries would often take payouts based on their own life expectancies. Starting with deaths in 2020, most nonspouse beneficiaries would need to deplete their entire share of the IRA/retirement plan account by the end of the year containing the 10th anniversary of the owner’s death unless the beneficiary met certain exceptions.
The 10-year rule seemed more straightforward and, despite having a shorter payout period, would allow for the ability to simply deplete the account within 10 years of the original IRA owner’s death rather than have a RMD each year. Or so we thought. In IRS Publication 590, Contributions to Individual Retirement Arrangements, released in early 2021, there was an example that left many industry experts baffled. The example showed a 10-year payout for a nonspouse beneficiary and spoke to an annual RMD over the 10 years. Soon after, the IRS amended the publication and explained that the only requirement was to deplete the account within 10 years and no RMD each year.
In February 2022, the IRS and Treasury Department issued proposed final regulations relating to the SECURE Act that, once again, left many experts surprised. In the proposed regulations, the 10-year rule would in fact have an annual RMD amount under certain circumstances. Although there was no definitive guidance on how this would affect prior tax years, it was widely assumed this would be for 2022 and beyond and would not force clients to take retroactive distributions.
Action items to consider:
1. Review beneficiary designations to understand impact of new rules.
2. Consider converting existing IRAs to Roth IRAs to diversify tax treatment during retirement and eventually for heirs.
The IRS is fielding comments through May 25, 2022, and we are hoping for clarity on this issue by June 2022. In the meantime, it may be prudent for anyone potentially affected by these regulations to wait for further clarity from the IRS.
We are closely monitoring the situation and will keep clients up to date on developments. Please reach out to your Glenmede Relationship Management Team with any questions or concerns.
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information obtained from third-party sources is assumed reliable but is not verified. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.