IRS Raises More Questions About New Retirement Account Provisions (1)

In the movies, retirement always looks so relaxing. It’s balmy weather, free time, lunchtime cocktails and cruises.

But here’s the part they don’t tell you: when it comes to figuring out retirement accounts, it’s not that easy. There are lots (and lots) of rules that govern contributions and distributions, and breaking those rules can lead to headaches.

Congress claimed it wanted to make saving for retirement easier by passing the SECURE Act of 2019. But, as taxpayers and tax practitioners are learning, the SECURE Act didn’t make it easy. A proposed set of regulations earlier this year baffled many – and while a notice released this month offers some relief, other questions remain unanswered.

SECURE Law

To make sense of the proposed regulations and notice, it is helpful to understand the SECURE Act.

Congress loves acronyms, and the SECURE Act confirms it: it stands for “Setting Every Community Up for Retirement Enhancement Act.” It was first passed by the House in July, but faced some backlash in the Senate. It was eventually absorbed into the Appropriation Bill 2020 and signed into law on December 20, 2019.

The idea behind the SECURE Act was to make participation in pension plans easier by expanding opportunities to save and allowing workers to keep money in the plans longer. Here are some of those changes with section numbers from Division O of the Act, which you can find herenoted in parentheses:

• The prohibition on contributions to a traditional IRA after age 70½ is repealed (Section 107). You can now contribute indefinitely.
• Companies can now enroll long-term part-time workers in 401(k) plans (Section 112).
• Withdrawals from pension plans for any “qualified birth or adoption distribution” up to $5,000 are without penalty (Section 113).
• The age at which pension plan participants must receive required minimum distributions, or RMDs, has been raised from 70½ to 72 (section 114).
• 529 accounts can be used to repay eligible student loans up to $10,000, tax-free, which may not be the case in some states (Section 302). Additionally, the term “qualified higher education spending” has been expanded to include funds used for registered and certified learning programs.
• Stretch IRAs are limited to eligible named beneficiaries (Section 401). This means that most non-spouse beneficiaries must empty an inherited IRA by the end of the 10th year after the death of the original account holder – this being tax, some exceptions apply.

To help taxpayers comply with some of these rules, the The IRS has created a web page which answers some frequently asked questions. However, at the time of this writing, the most recent update predates Advisory 2022-53 (keep reading to learn more about the advisory).

Questions about the new law

Most of the changes made by the new law were supposed to come into force in 2020. There was only one problem: there was no indication of these changes. This meant that many tax practitioners were forced to come to their own conclusions about how best to interpret the new law.

Many believed, for example, that the new 10-year rule for RMDs would work like the old five-year rule. Under this rule, you could wait until the final year to receive your distribution as a lump sum, and it would still qualify.

The proposed settlement, released in February 2022, took a different approach. They suggested that the countdown would start for taking out RMDs from the year after the participant died if the participant died on or after their own required start date. In addition, the draft regulation refers Section 401(a)(9)(B)(i) of the Tax Code which states that if the employee dies after the distributions have begun, the employee’s remaining interest must be distributed “at least as quickly” as the method of distribution used by the employee on the date of the employee’s death. the employee.

The details get complicated quickly and are beyond the scope of this article. But generally, the result of this interpretation is that beneficiaries subject to the new law and not otherwise excluded should begin to withdraw RMDs within one year of death, and not as a lump sum. This means that the beneficiaries concerned should have taken RMDs in 2021 and 2022, as the case may be. Those who did not were technically non-compliant and may owe a whopping 50% excise tax under Chapter 4974.

Public reaction

It didn’t seem fair, and commenters let the IRS know – that’s the whole point of the public comment period. You can read a sample of those comments here:

Notice 2022-53

As a result, this month the IRS issued Notice 2022-53which makes it clear that the IRS intends to issue final RMD regulations under section 401(a)(9) “that will not apply until distribution calendar year 2023” and provides guidance on certain provisions that apply for 2021 and 2022 .

Specifically, the notice clarifies that to the extent a taxpayer has not taken a specified RMD related to this rule, the IRS will not impose the Section 4974 penalty. And, if a taxpayer has already paid the excise tax for a missed related RMD, the taxpayer can request a refund.

Hourly

Timing is important. The relief applies to beneficiaries of a defined contribution plan or IRA when the employee or IRA owner died in 2020 or 2021 and on the required start date of the employee or IRA owner or after. In other words, it applies to any distribution under the interpretation included in the proposed settlement that should have been made under section 401(a)(9) in 2021 or 2022.

The relief does not apply to certain beneficiaries, such as spouses, who were not subject to the 10-year rule. This also does not apply to taxpayers who were otherwise required to take their RMD in 2021 or 2022.

Room for interpretation?

As taxpayers and practitioners consider the implications of the proposed regulations and notice, it is unclear whether the IRS will reconsider its stance on the 10-year rule. An IRS spokesperson confirmed that the agency is reviewing all comments received during the comment period. And at the American Bar Association’s fall tax meeting in Dallas last week, IRS officials said that the agency has set a tentative deadline of the end of 2023 to complete most of its regulatory work under the SECURE Act (link is for subscribers only).

SECURE 2.0

There is a possibility for more change. Earlier this year, the House passed a supplemental retirement savings bill, Securing a strong 2022 retirement law, billed as “SECURE 2.0”. The House version of the bill would automatically enroll employees in 401(k) or 403(b) plans, although you can opt out. It would also increase the catch-up contribution limits for employees aged 62 to 64. And notably, it would delay RMDs to 75 by 2032. This bill was sent to the Senate and then referred to the Finance Committee, where it currently sits.

There is no specific language in the bill that would clarify the 10-year rule. However, the tax and financial planning communities have suggested that a final version of the bill may also address these issues.

And now?

If this all sounds a little messy, you’re not wrong. Retirement account rules can be complicated and questions often arise when interpreting new laws. But when you put those two things together? It’s impossible not to feel somewhat uncertain.

This should not, however, result in inaction. It is essential that taxpayers feel comfortable working with their advisers. Don’t be afraid to ask questions about next steps and whether these changes impact retirement, tax and investment strategies. And when the future isn’t entirely clear, don’t assume it won’t affect you. It is worth checking back from time to time to see how the law and how it is interpreted is changing.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest tax news, tax law and tax policy. Look for Erb’s column each week in Bloomberg Tax and follow her on Twitter at @taxgirl.