Perspective Matters
As we close out 2024, it's important to understand how recent retirement legislation affects your financial planning. Let's review the key changes from the 2020 SECURE Act and 2022 SECURE 2.0 legislation that are already in effect or will begin next year. I've also included a practical Year-End Checklist to help you plan for your financial independence. If you prefer, you can skip directly to the detailed resource links at the end of this post.
UNDERSTANDING THE IMPLEMENTATION PROCESS
This July, the IRS released its final regulations for the 2020 SECURE Act and proposed regulations for SECURE 2.0. This regulatory process highlights an important point about retirement legislation: there's often a gap between when Congress passes a law and when we know exactly how it will work in practice. The IRS and Department of Labor must review the legislation, write implementation rules, gather public feedback, and then issue final regulations.
This implementation process has created some challenges. When Congress required immediate changes without giving agencies adequate time to develop guidelines, it led to some uncertainty. For example, the IRS suspended penalties for missed distributions from inherited IRAs from 2021 through 2024. However, they've made it clear that these penalties will return in 2025.
I'm going to list here the final result of the 2020 rules and the proposed 2022 rules and invite you to CLICK HERE to read more of an explanation of what these rules mean for you.
RMDs in the 10 year period – the “At Least As Rapidly Rule” – RETAINED
Eligible Designated Beneficiaries (EDBs) – EXPANDED
Year-of-Death RMD – DEADLINE EXTENDED
Monitoring Concurrent RMDs – ELIMINATED
Hypothetical RMD rule for Spouse Beneficiaries – RETAINED
Trusts as Beneficiary – RULES LOOSENED
New Rules for Spouse Beneficiaries – CLARIFIED
First RMD for those born in 1959 – CLARIFIED
UNDERSTANDING THE "AT LEAST AS RAPIDLY RULE"
The "At Least As Rapidly Rule" caught many financial advisors by surprise when it appeared in the SECURE 2020 proposed rules, and it will impact many IRA inheritors. To understand its significance, let's look at how IRA inheritance worked before the 2020 SECURE Act.
Previously, most non-spouse beneficiaries could use what's known as a "Stretch IRA." This option allowed beneficiaries to withdraw money from their inherited IRA over their entire lifetime, spreading out both the distributions and their tax impact. This strategy was particularly valuable for estate planning – for instance, a grandparent could name a grandchild as beneficiary, effectively postponing the tax liability for decades.
THE NEW LANDSCAPE OF IRA INHERITANCES
The original SECURE Act significantly changed this landscape. Most beneficiaries must now withdraw all funds from inherited IRAs within ten years of the original owner's death, which accelerates tax payments. Initially, the legislation didn't specify whether withdrawals were required during this ten-year period. However, the IRS's final rules now require annual distributions in certain cases.
Here's a simple way to think about these new distribution requirements: imagine a water faucet. Once an IRA owner reaches their required beginning date (RBD) and starts taking distributions, the "faucet" is turned on – and it can't be turned off. This means their beneficiary must continue taking annual distributions, calculated based on the beneficiary's age. Remember, the entire IRA still needs to be emptied by the end of the tenth year after the original owner's death.
A SPECIAL NOTE ABOUT ELIGIBLE DESIGNATED BENEFICIARIES (EDBS)
There's one more important detail to understand: Eligible Designated Beneficiaries (EDBs) can still use the Stretch IRA option. However, if an EDB's status changes to a Non-Eligible Designated Beneficiary (NEDB), making them subject to the ten-year rule, they must continue taking annual distributions since they were already required to take them as an EDB.
I know these are a bit confusing – I’ve got some links at the end of this to different documents to explain some of these rules in more detail – and of course you can always consult a Certified Financial Planner® professional, especially one who is also a member of Ed Slott’s Master Elite IRA Advisor GroupSM for help.
Now, let’s review some of the changes that went into effect in 2023 and 2024:
RMD age raised to 73 (QCDs still available at age 70 ½)
Qualified Longevity Annuity Contract (QLAC) rules modified, eliminating the 25% limit and increasing the maximum contribution to $200,000 (indexed for inflation)
Penalties for missed RMDs reduced to 25%, and down to 10% if corrected “timely”
IRA annuity aggregation with other IRA assets for RMDs
Added a one-time $50,000 QCD (indexed) to a CRUT, CRAT, or charitable gift annuity
Expanded Age 50 exceptions to include private sector firefighters and state and local government corrections workers
Added statute of limitations for missed RMDs and excess contributions
Added exceptions to the 10% penalty rule – some are applicable to IRAs only, some to Qualified Plans only, and some to both (see link below for more details)
Special Needs Trusts may have a charity as a remainder beneficiary
Roth allowed for SIMPLE and SEP Plans
Roth employer contributions allowed (both match and nonelective)
IRA catch-up contributions are indexed for inflation
Employers may make matching plan contributions on student loan payments
529 funds may be rolled over into a Roth IRA (subject to annual contribution and lifetime limits)
No RMDs on Roth in Qualified Plans
LOOKING BACK AND LOOKING FORWARD
The 2020 SECURE Act introduced several important changes that are worth reviewing:
No age limit for Traditional IRA contributions if you or your spouse are still working
529s may be used for costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments
The definition of “compensation” for IRA contributions is expanded to include taxable fellowships and stipends for graduate or postdoctoral students
Foster care workers can use certain funds excluded from taxable income (“difficulty-of-care” payments) to make certain IRA and employer plan contributions
It’s easier for employers to offer annuities in retirement plans
Unearned children’s income is taxed at their parents’ top marginal rates, instead of at the rates for estates and trusts
FUTURE CHANGES TO WATCH
As we look ahead, more changes are coming:
2025
Higher catch-up limits for workers aged 60 – 63 for Qualified Plans and SIMPLEs
2026
Catch-up contributions for workers earning more than $145,000 (indexed) must be Roth
ABLE program age requirement for onset of disability raised from 26 to 46
More exceptions to 10% penalty for early withdrawals
PLANNING FOR YOUR FUTURE INDEPENDENCE
To help you stay on track with your financial goals, I've created a Year-End Checklist. These are the key areas you should review:
Life Events – have any of these occurred for you and/or your family in 2024?
Birth, death, marriage, divorce, remarriage, illness, job change or retirement
Began collecting Social Security benefits
Received an inheritance or substantial financial gift, created a trust, changed your residence
Change of IRA or plan custodian, Roth conversion
Conversations to have with your beneficiaries
Rules for RMDs for IRA owners and beneficiaries, including the importance of properly titling inherited IRAs
Additional tax benefits available to beneficiaries, including net unrealized appreciation (NUA) and income in respect of decedent (IRD) deduction
Have you hit any milestone ages?
Have you taken advantage of all of your IRA and plan related opportunities and met all of your requirements? (See the link below for more details)
GETTING ADDITIONAL SUPPORT
This overview doesn't cover every change in the SECURE Act and SECURE 2.0, nor is the checklist exhaustive. For more detailed information, please explore the links below. If you'd like personalized guidance, I invite you to schedule a 30-minute introductory call with me to discuss how these changes affect your specific situation and how I can help you navigate them.
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Neither Prism Planning and Solutions Group nor Insight Advisors provide tax advice, and nothing in this communication should be treated as such. This communication should not be interpreted as a recommendation for a specific investment or tax-planning strategy. We are providing this material for informational purposes only. We have made every attempt to verify that information contained in this communication is accurate as of the date published but make no warranties. Before making any decisions related to your own tax and/or investment situation you should consult the appropriate professionals.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.