Tax law can be very complicated, and regulations offer interpretive guidance that helps us get the answers right.
In late February, the Treasury Department issued regulatory guidance on the SECURE legislation that was enacted in December 2019. SECURE stands for the “Setting Every Community Up for Retirement Enhancement Act.” Thank goodness for acronyms.
The regulations are written with normal words. Had Treasury used acronyms throughout, the length might have been 30 or 40 pages instead of 275.
In the silver lining category, it turns out that the full words are actually easier to understand. The regulations explain when distributions must be made from retirement accounts.
SECURE changed the age for required minimum distributions (RMDs) from 70½ to 72. This is effective for distributions first required to start after Dec. 31, 2019.
Americans are well known for not saving for retirement. This means most of us will not want to delay taking distributions otherwise available penalty-free.
For those blessed with resources to allow a delay in tapping retirement accounts, it is best to allow the retirement accounts to grow free of tax. Tax-free growth is not available in nonretirement accounts.
RMDs are required for all forms of retirement accounts. For non-IRA assets, it is possible to delay distributions beyond age 72 if you continue to work for the employer that offers the plan. This is so only if you do not own more than 5% of the employer.
A final point is that the first required distribution may be delayed until April 1 of the year after you reach the required beginning year.
To illustrate, let’s say that you reach age 72 in November 2022. You must begin RMDs from your IRA in 2022, but the law allows the first distribution to be delayed to April 1, 2023. You would also need to take the second year distribution in 2023.
If the plan is a 401(k) plan, and you are still working for the employer, you do not need to start RMDs. Let’s say you retire in December 2023, and set Dec. 31 as your final date.
Since you terminated employment, you must take your first RMD for the 2023 year. However, this first distribution can still be delayed until April 1, 2024.
Even if you continue working past age 72, distributions from an IRA must still begin on the “regular” schedule.
SECURE changed the distribution timing for inherited IRAs. Pre-SECURE it was possible to have a “stretch” IRA that allowed a designated beneficiary to extend the payout over their life expectancy.
SECURE mandates that beneficiaries must receive all payments by the end of the 10th year following the year of the account owner’s death. Therefore, if dad dies in 2022, all payouts must occur by Dec. 31, 2033.
There are a few exceptions to the 10-year rule. First, a spouse beneficiary may extend payments over their life expectancy. Second, a minor child may defer payments until the minor reaches age 21.
The regulations tossed a wrench into the minor’s payout rule if the account owner had already started receiving RMDs before death. The minor must then continue RMDs even before reaching majority.
The regulations adopted a uniform age of 21 to define age of majority. This applies without regard to state law. If an employer plan already in place set a different age, the plan’s definition of majority may continue.
If a beneficiary is either disabled or chronically ill, payouts can also be deferred beyond the 10-year rule. The regulations have different definitions of disabled based on whether the beneficiary is, or is not, under age 18 at the time of the owner’s death.
The final exception from the 10-year payout applies when the beneficiary is no more than 10 years younger than the account owner. There is less opportunity to “stretch” payouts when the beneficiary is close in age to the decedent.
A young account owner who is unmarried might name parents or siblings as beneficiaries. The beneficiary should then be able to avoid the 10-year payout.
These regulations will change from their proposed to final form. But they are the current guide for distributions.
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.