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IRA Financial Blog

New RMD Rules – Episode 330

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses possible new required minimum distribution (RMD) rules that may complicate retirement strategies.

Hey everyone and welcome to another episode of Adam Talks. I’m Adam Bergman, tax attorney, founder of IRA Financial. In today’s episode, new RMD proposed regulations. Oh, my God.

Believe it or not, the IRS found a way to take a pretty straightforward required minimum distribution regime and make it even more complicated. Hard to believe. So just a step back. If you turned 72 before 2019, the old required minimum distribution regime you’re under, which is basically a life expectancy, that you take out about 3% a year until you die, that regime is still in place. You’re still in that system.

Okay? And if you didn’t elect into that system, you generally would have five years to pull it all out. That was okay. Pretty simple. There was an annoying formula each year you had to do a formula which basically took your life expectancy and then multiplied it by the value of your IRA or 401(k). And then you would be able to take out your RMD before 12/31 and then put it on your tax return.

The SECURE Act came out in 2019, added a bit of a wrinkle to that, and essentially said this, if you turn 72, the RMD went from70 1/2 to 72, the required minimum distribution age. If you’re 72 and you die, your spouse can always take the IRA and put it into his or her name, and that rule still applies today. It will apply under the new RMD rules and applied it under the old pre-SECURE Act. So most common approach is when you die, your spouse, your husband or wife would take the IRA or 401(k) and just put it into their name. So if the husband dies with an IRA, the wife would just put the IRA in his or her name. And then if the wife, in this case was under the age of 72, there’d be no RMDs until the wife turned 72.

That’s generally the more common approach. The same rules apply today. And if the new RMD rules kick in, if the husband or wife dies, the surviving spouse would just put the IRA in his or her name and then based off their age, they would be able to take those funds out. Okay, so that rule still applies. The rules with Roth IRA are somewhat different too. The SECURE Act now, if you pass away, your surviving spouse will have the Roth in their name, there’s no RMDs. Okay. But, if it goes to a non-spouse, then there’s a ten-year rule. And that’s how the SECURE Act changes it from previous RMD regimes, where it was a life expectancy regime. In the case of non-spouses, they’d have a longer period of time to stretch out that Roth IRA. Even though it’s not a taxable distribution, it would still need to be taken out as a distribution over a longer period of time, generally in ten years. So, Roth IRAs, again, just to confirm, I’ll get Roth IRAs out of the way quick because it’s the easier part of this.

Spouse dies, surviving spouse puts the Roth IRA in their name. No RMDs. Once it goes to a non-spouse, ten years to pull it out, no tax. It doesn’t have to be pro rata. It’s just by the end of year ten, all the money has to come out. So now let’s get into the complexities of these rules.

So on February 24, 2022, Treasury and the Internal Revenue Service published proposed regs. Comments are still available. So if you have issues after listening or watching this podcast, feel free to reach out to the IRS and let them know. But they basically reflect amendments in the SECURE Act made to post-death RMDs after 2019. But like almost everything the government does, they make it more difficult and sometimes even more complex. So, I’ll go through the rules now and then kind of give you what my thoughts would be if I worked for the IRS.

So as I mentioned, the SECURE Act basically played around and transformed the RMD regime and turned most everything into a ten-year rule for pulling funds out once it goes from a spouse to a non-spouse beneficiary.

So now let’s talk about what these proposed regs do. So number one, they designate and define what an eligible designated beneficiary is, because there’s rules for EDBs and non-EDBs. And when I say EDB, I mean an eligible designated beneficiary, which is a surviving spouse, who is not electing to put the retirement account in their name and a child before they reach the age of majority, which is 21, disabled, chronically ill or not more than ten years younger than the participant. Okay. So if you’re an EDB, you’re going to have certain rules that apply to non-EDBs.

So let’s break it down. The new RMD rules and the retirement account participant or IRA owner dies after the age of 72. So let’s say they’re 80 years old. Okay. If the beneficiary is a non-EDB. Right? So it’s a non-surviving spouse; well, it’s someone who hasn’t elected. It’s not someone under 21, not chronically ill, not disabled. Let’s say the surviving spouse has it in their name, for example.

So RMD rules and death after 72, if you’re not an EDB, basically, the new rules say that you take an annual RMD over a ten-year period, and whatever’s left, you have to take out at year ten. So this is actually a big change from what people thought the SECURE Act said. People thought, including myself, thought the SECURE Act said that you have ten years to pull the money out. So if someone dies over the age of 72 with an IRA of 401(k) and it’s going to a non-EDB, then we thought it was ten years. So you can take it out all in year ten. You don’t have to take it out year by year by year. The new rules say no, it’s pro rata each year and whatever is left, after year ten. So this is actually a quite controversial change.

Now, what happens if the beneficiary is an EDB? Well, I’ll break it down, actually children and someone who’s disabled or surviving spouse, that doesn’t make the election to have the IRA in their name. If the beneficiaries in EDB and again the retirement account deceased is over the age of 72, the EDB would need to take into income annual under the at least as rapidly rule using the longer of the deceased retirement account owner or their life expectancy. So basically, after retirement account owner’s death, distributions will continue at least the age using the longer of the deceased retirement accounts life expectancy or the EDB’s life expectancy. And then once the EDB dies, let’s say the disabled individual, then it’s ten years from that person’s death. So in other words, distributions must last over the longer of the deceased retirement account owner’s life expectancy or the EDB’s remaining life expectancy.

But, all amounts must be fully distributed by the end of the 10th year anniversary of the EDB’s death, or if the EDB is older than the deceased, then end of the year in which the EDB’s life expectancy will be equal to less than one of the life expectancy of used in that distribution period.

I know. Super confusing. Forget about that! Basically, this is what you need to remember: if the beneficiary is an EDB and someone dies over the age of 72, okay, basically, if they’re not a child, the distributions again are the longer of the remaining life expectancy of the deceased or the EDB’s remaining life expectancy. But everything must be fully distributed by the 10th year of the EDB’s death. So let’s say the disabled person’s death. If the EDB is a child, minor child, the distributions must continue over the longer of the employee’s remaining life expectancy and the EDB’s remaining life expectancy. But again, all amounts must be fully distributed – the earlier the end of the year, the EDB attains the age of 31. So it’s ten years or the end of the year containing the 10th anniversary of the EDB’s death.

So it’s a little bit different if there is a minor child because you can use the longer of the deceased remaining life expectancy and the EDB’s remaining life expectancy. But everything must be basically taken out in ten years, which is a little bit unlike the previous where if it’s a non-child, everything must be taken out of the 10th anniversary of the EDB’s death, which is different than age of 31. So that’s the distinction between a child and someone who’s not a child but an eligible designated beneficiary.

I know, stupid! Super confusing! Why didn’t they just say this: ten years, right? So if you’re an EDB. And again, I’m not saying ten years works or life expectancy works better, but since we’re going after the SECURE Act, why don’t you just say this: someone dies, it’s not a surviving spouse: ten years. If it’s a child, ten years from when they hit 21, that’s it. How hard is that? I can write those regulations in literally one paragraph. I don’t know why you need hundreds of pages to do that.

Anyways, let’s add some more complexity. What happens if the deceased dies before the age of 72 and the beneficiary is not an EDB? Okay, then it’s a ten-year rule. No stretch. Basically, you have to take distributions, and after year ten, everything has to be gone. The ten-year rule applies. No distributions are required until 10th year. So you can do year 1,2,3,4,5,6,7,8,9, or you can take it all out at year ten. That is only if the beneficiary is under the age of 72.  If they’re over 72, distributions need to be every year, and the rest needs to be taken out, whatever’s remaining, at year ten.  That’s if they’re over 72 and their beneficiary is not an EDB.

If the beneficiaries in EDB, here we go again. More fun. Okay, so if the designated beneficiary is an EDB who’s not a child, ten year rule, no distribution is required until the end of the year containing the 10th anniversary of the deceased’s death.

So this is the ten-year rule. Or you can stretch it over the EDB’s life.  Again, so you have a little bit more flexibility if the person that died is under the age of 72; ten years, or you can stretch it out over the EDB’s life. If the EDB is a child, then you get the ten-year rule. Or you can stretch it out again over the EDB’s life. But, all amounts must be fully distributed by earlier EDB hitting 31 or 10th year anniversary of the EDB’s death.

So again, it’s kind of like a ten-year if it’s a child. If it’s a non-child, you can stretch it out basically until it’s distributed containing the 10th anniversary of the EDB’s death. So you can stretch it out much longer than if it was a child.

I don’t understand it. I don’t know why there’s distinctions between a child who’s an EDB and a non-EDB, like a disabled child or a spouse that doesn’t elect to take the IRA in their own name. I don’t understand it. I think it’s super confusing. And then here’s another wrinkle. If it’s a trust, it’s a five-year rule. Okay, so whatever.

As a tax lawyer, it always just irks me when I read regulations. And I just don’t understand because the people, the Treasury, the IRS, a lot of them are lawyers that are writing this stuff. And I’m not saying they’re not smart. They certainly are smart. They understand these sections of the code, but it took them two years, over almost two and a half years to write these regulations, and they made it even more complicated. All they have to say is, listen, if it’s a non-surviving spouse inherited IRA, it’s ten years. If they’re under 21, it’s ten years from they hit 21. That’s it. Pretty simple. I think everyone would understand that if it’s a Roth, IRA, nonspouse: ten years to take it all out.

Why don’t you give the individual the opportunity to decide when they want to take it out? But everything needs to be distributed by year ten. Another rule is that if you are surviving spouse, you have to now elect to take the retirement account into your name. Okay, so that’s a little bit different. Before, you had a long time to do it. Now you essentially have a year or so to make that election. It’s one year from the calendar year in which they attain age 72 and the end of the calendar year following the calendar year of the IRA owner’s death. Okay, so it’s not an or, it’s an and.

There is a time limit on when you can make the election. Again, it’s the later of when they hit 72 or a year of death. Okay. Whereas before, you didn’t have those limitations. Also, if there’s multiple beneficiaries, so let’s say someone passes, there’s multiple beneficiaries, multiple people, different ages. Under the pros regs, an employee that has more than one beneficiary deceased retirement account holder, the features of the oldest beneficiary determines the denominator to the RMD and whether full descriptions are required under the ten-year rule.

So you’re looking at the oldest beneficiary. So if multiple designated beneficiaries is not an EDB, the deceased is treated as not having any EDB. So it’s something to consider. And again, even if one or more of the older beneficiaries is an EDB. If any of the multiple designated beneficiaries is not an EDB, then the retirement holder is treated as not having EDB, even if one or more of the other beneficiaries is an EDB.

All this, I know it’s super confusing, but let me just simplify this and end with this. If you pass, you’re most likely the surviving spouse is going to put the IRA in his or her name. If it’s a Roth and it goes to a nonspouse, ten years. If you have a nonspouse, then you have to decide if that person is an EDB. So disabled, chronically ill, or not more than ten years younger than the participant (deceased).

So someone dies at 75 and the spouse is 68, less than ten years, they’re technically an EDB. So if the surviving spouse elects to take the IRA in his or her name, great. If they don’t, they are an EDB, and then you’ve got to follow the rules and look at whether the deceased is older or younger than 72. If they’re older than 72, again, it’s ten years. And if it’s not an EDB, ten years distributions each year; everything needs to be taken at year ten.

If it is an EDB, then there’s certain rules. Again, child or non-child. If it’s a non-child, you can stretch over the EDB’s life expectancy, but all amounts must be taken by the end of the year containing the 10th anniversary of EDB’s death. If it’s a child, it’s basically ten years when they hit 31, ten years when they reach 21. If the person dies before 72, then there’s different rules.

If it’s a non-EDB, it’s ten years. Everything must be taken at year ten pro rata and then if it’s a child, it’s basically by turning 31; non-child, then you basically have a ten-year rule and you have until ten years of the deceased’s death. You have that ten-year rule or you can do a little stretch if you’d like and stretch it over 10th year of the EDB’s death, so you have a little bit of time there.

Again, sorry to make this super complicated. It wasn’t my intention. I didn’t create this stuff. Again if it was up to me; it’s funny. I had to talk with a colleague of mine and just like I don’t understand this, this is so stupid. The SECURE Act was supposed to make things easier and now these proposed regs just made everything way more difficult. Why not just do ten years? Forget EDBs, just have it someone’s under 21, it’s ten years from when they hit 21, someone’s disabled or they’re ten years younger or older, who cares? It’s ten years if they don’t put the IRA in their name. If it’s a Roth nonspouse ten years, forget about pro rata each year. Why make the calculations complicated?

Just tell people they have ten years to take all the money out and by year ten it all has to be distributed. That would be easier. I think we’d all agree that that makes sense. I think that’s what people thought the SECURE Act said and what the intention was by the House Ways and Means Committee. But looks like the IRS and Treasury have different ideas.

Sorry, it’s just more layers of complexity. Now we each need a table to figure out, are you an EDB? What’s your age? And then decide based off those two factors what you have to take up. I know. Super confusing. I’ve done my best. I’ve drafted a blog on this. You can check out that summarizes all this. I’ll also publish a table on our website if you’re looking for info on the RMD world based off new proposed regs.

These are not final. They’re proposed. So maybe we all could send in public comments letting them know that this is super complicated. Why don’t you just stick with ten years? Everyone will be more content with that and I think it will create less confusion.

So sorry for making you feel like you’re back in law school or if you haven’t gone to law school that you are in law school. That’s not my intention. Law school is actually not this complex. It’s pretty simple. You just got to basically review a lot of case law and just memorize cases and rulings.

But this is more confusing. It shouldn’t be. Hopefully, public comments will reduce some of the complexity and just keep it a simple ten-year rule.

Anyway. Thanks for listening. Thanks for watching. If you haven’t subscribed. Subscribe. If you haven’t given us a like, please do. Otherwise, check us out next week Adam Talks drops every Wednesday and appreciate you guys listening. Thanks again and have a great week.


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