The IRS has recently clarified important aspects of the SECURE Act and SECURE Act 2.0, addressing gaps and answering questions about the changes to retirement accounts like IRAs and 401(k)s.
These changes directly affect how individuals plan for their retirement and manage their required minimum distributions (RMDs).
Key Updates and Clarifications
While much of the attention surrounding the SECURE Acts has been on the end of the Stretch IRA and the introduction of the 10-year rule, there are many other crucial updates that retirees and account holders need to know. The recent IRS regulations provide clarity on several issues, helping individuals make more informed decisions about their retirement savings.
1. The New RMD Age Changes
The SECURE Acts brought significant changes to the age at which you must begin taking Required Minimum Distributions (RMDs) from your retirement accounts.
- RMD Age Shift: The starting age for RMDs has changed multiple times, from 72 to 73 and now to 75, depending on your birth year. However, a mistake was made in the original legislation for individuals born in 1959, listing two different ages for RMDs—73 in one section and 75 in another. The IRS has now corrected this, confirming that those born in 1959 must begin RMDs at age 73.
- What Does This Mean for You? If you are approaching retirement and fall into this category, it’s crucial to keep track of the correct RMD start age to avoid penalties.
2. RMDs After the Account Owner’s Death
Another key clarification is how RMDs are handled when the original owner of a retirement account passes away.
- RMD for Beneficiaries: If the account owner has passed without taking their RMD, the beneficiary must take the distribution by the end of the year of death. The amount will be included in the beneficiary’s gross income, and it should follow the same life expectancy schedule that the original account owner used.
- Actionable Tip: Make sure that the necessary RMDs are taken from your retirement accounts before you pass to avoid complications for your beneficiaries.
3. RMDs and Annuities: Simplified Rules
For those with retirement accounts that include annuities, the IRS has streamlined how RMDs should be handled in these cases.
- Combined RMD Requirement: If your retirement account includes both an annuity and other investments, you do not need to calculate RMDs separately for each. Instead, you can satisfy the total RMD requirement by taking the necessary distribution from either the annuity or the non-annuity portions, or both. This simplifies the management of RMDs for those with complex retirement accounts.
- Remember: When the annuity makes distributions to the account owner, those payments count toward your RMD for the year.
4. Roth 401(k) Changes: No More RMDs
Before SECURE Act 2.0, Roth 401(k) account holders were required to take RMDs, but that has changed.
- No RMD for Roth 401(k) Owners: With the new regulations, the original owners of Roth 401(k) accounts are no longer subject to RMDs, aligning them with Roth IRA rules.
- What This Means for You: If you have both Roth and traditional 401(k) accounts, your Roth 401(k) balance won’t factor into your RMD calculations for your traditional 401(k), allowing you to better manage your distributions.
5. Rollover Rules for 401(k)s and IRAs
The IRS has clarified how rollovers from 401(k) accounts to IRAs should be handled, especially in cases where an individual has both traditional and Roth 401(k) accounts.
- Traditional 401(k) to IRA: If you have a traditional 401(k) and are retiring, you must first take your RMD from that 401(k) before rolling over the remaining funds to a traditional IRA. This ensures that you are compliant with RMD rules for the year.
- Roth 401(k) Rollover: The good news for those with Roth 401(k) accounts is that no RMD is required, and the entire balance can be rolled over to a Roth IRA tax-free.
6. Qualified Longevity Annuity Contracts (QLACs) in IRAs
A major benefit introduced by the new regulations is for individuals looking to invest in Qualified Longevity Annuity Contracts (QLACs) within their IRAs.
- QLAC Rollover: If you’re dissatisfied with the QLAC purchased for your IRA, the IRS now allows a tax-free rollover of funds from one QLAC to another. This provides greater flexibility in managing your long-term retirement strategy without facing adverse tax consequences.
The latest IRS regulations bring much-needed clarity to the SECURE Act and SECURE Act 2.0, addressing critical issues such as RMDs, annuities, Roth 401(k)s, and QLACs.
By staying informed about these changes, you can ensure that your retirement planning is aligned with the latest rules, potentially saving you money and reducing stress in the future.
- Next Steps for You: Take a moment to review your retirement accounts, especially if you are nearing the RMD age or have multiple types of accounts. Consider speaking with a financial advisor to make sure you’re taking full advantage of the new regulations, from RMD management to tax-free rollovers.
By understanding and implementing these clarifications, you can ensure that your retirement funds are working for you, not against you.
