Current info for IRA Rules (SECURE ACT)?

[ERD50]

Maybe I'm missing it, but it seems even the IRS site is not up to date, other than a few notes about SECURE Act changes, but then the text of the publication has the old rules.

When I do searches, I find a lot of old stuff, and the current stuff I find is giving me a headache. I know it's not that complicated, but they seem to mingle all the different cases in the same sentence/paragraph, so you get a lot of "This rule applies if you are XYZ, and unless it is under rule ABC, and if the owner was 70 1/2 before 2020, and if you are a spouse, but if you are just a friend, , and if..... and on and on". It's driving me batty.

Here's the format I'm looking for, with separate clear statements on each case, not a string of if, and, buts:


Trad-IRA - Distribution/RMD rules for an owner. To cover everyone, a separate paragraph for owners who have already taken RMDs, and those who have not had to take RMDs yet (since SECURE Act changes this from 70 1/2 to 72, it matters)

Trad-IRA Inheritance - Distribution/RMD rules for spouse and non-spouse who inherits a Trad-IRA in 2020+.


Roth IRA - Distribution rules for an owner.

Roth IRA Inheritance - Distribution/RMD rules for spouse and non-spouse who inherits a Roth IRA in 2020+

I'm in the process of updating my Estate plans, and I'm trying to put together a letter for spouse and kids how all this works. Maybe it's the engineer/programmer in me, but I want simple statements for each case, not rambling prose.

I get lost in the prose. I think this was pre-SECURE Act rules, but I've seen stuff about distributing an inherited Roth in 5 years, but then it says you can do it over your lifetime, and/or take out any amount any year. Isn't "taking it out in 5 years" a subset of that? I get lost. But I guess now, non spouse Inherited Roths must be emptied within 10 years?

Can anyone help, please! Is there a source that makes this clear? It's not rocket science!

TIA-ERD50

 

[Midpack]

It should be more clearly and prominently stated, but we know the IRS is WAY behind on everything presumably due to SARS2 absences/working from home. I assume they will update eventually. I’d think these IRS docs would be sufficient references to protect anyone currently affected by RMDs? But I’m PUI...

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the age for which an RMD is first required from age 70½ to 72. Under prior law, financial institutions would have needed to notify IRA owners who attained age 70½ in 2020 about their 2020 RMDs by January 31, 2020.

The Act was enacted on December 20, 2019. Division O of the Act, titled “Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE Act), included a number of retirement savings provisions. Section 114 of the SECURE Act amended § 401(a)(9) to change the required beginning date applicable to § 401(a) plans and other eligible retirement plans described in § 402(c)(8), including individual retirement accounts and annuities (IRAs). The new required beginning date for an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 701⁄2.

https://www.irs.gov/newsroom/irs-pr...ng-the-age-for-required-minimum-distributions

https://www.irs.gov/pub/irs-drop/n-20-06.pdf

 

[SecondCor521]

Well, it is complicated. I can give you a first pass, but I'm going to throw in the word "generally" sometimes to cover the fact that sometimes there are additional requirements in order to make what I say correct.

I'm sure if I'm wrong @pb4uski or someone will be along to correct me.

1. Traditional IRA RMD rules for the owner. Generally the owner is required to start RMDs in the year in which they turn 72. The RMD is simply the previous year's 12/31 balance divided by a divisor. The divisor comes from a table. Which table you use depends on your situation, but most people use table 3.

2a. Traditional IRA inheritance spouse. The spouse has several options. The simplest choice I know of is to roll it into their own traditional IRA.

2b. Traditional IRA inheritance non-spouse. Generally the beneficiary must drain the account by 12/31 of the year containing the 10 year anniversary of the death. So if you died today, your non-spouse beneficiaries would have until 12/31/2030 to drain the account. These are not RMDs, so there is no set schedule, but the entire account must be drained in that period. Any distribution in any year creates taxable income; so if the beneficiary removed $20K this year, they'd have an additional $20K in ordinary income.

3. Roth IRA distributions owner - there are no requirements at all for an owner to make Roth distributions ever at any time.

4. Roth IRA inheritance spouse and non-spouse. These are the same as the traditional IRA above. The only difference is that the distributions do not create taxable income.

(And yes, the 5 year rule was before the SECURE Act changed it to 10 years.)

(And I believe the IRS generally updates their publications on an annual basis. Since the SECURE Act only took effect 1/1/2020, all of the IRS PDFs don't include it because they're the 2019 versions. So if you look at the very top of, say, the current version of Pub 590-B, it will say "for use in preparing 2019 returns". As @Midpack alludes to, the IRS will have some web pages talking about the SECURE Act, but the publications themselves won't be updated until January 2021.)

 

[ERD50]

Thank you both.

It's (IMO) really not that complicated when it is laid out clearly. I was really getting frustrated yesterday, every site I found co-mingled all the cases, with references back and forth. I like a one-to-one correspondence.

As an example (though this was published before 2020, so it is moot anyhow, but an example of what I consider very, very poor writing), look at this wording from fairmark.com. I've always found fairmark to be a good source on tax matters, but could this be any more convoluted, or is it me?

https://fairmark.com/retirement/roth-accounts/roth-distributions/inherited-roth-ira/

Non-spouse beneficiary

The distribution rules that apply to an inherited Roth IRA are the same as the ones used for traditional IRAs in a situation where death occurs before the “required beginning date” for minimum distributions. This is true without regard to the age of the Roth IRA’s owner at death, because there is no “required beginning date” for distributions from Roth IRAs.

For a beneficiary other than a spouse, distributions must satisfy one of the following rules:

Rule 1: Receive the entire distribution by December 31 of the fifth year following the year of the owner’s death.
Rule 2: Receive the entire distribution over your life, or over a period not extending beyond your life.

First off, they say "same as Trad IRA", but this article is about Roths. There is no mention of Trad IRA rules in the article, so someone would have to go look for that elsewhere, or already know it (and probably don't need this article - they already know it all!).

The 2nd sentence just seems like nothing but blah-blah to me. If there is no no “required beginning date” for Roths, then why even mention that it " is true without regard to the age of the Roth IRA’s owner at death"? To me, that's like saying "It is true that if you own an Electric Car, you should follow your owners manual for the recommendation on changing the engine oil, which is true regardless of miles between oil changes because electric cars don't have engine oil"? Or is there some meaning there that I'm missing?

Shouldn't this be understandable by anyone of even less than average intelligence, as many tax payers are of less than average intelligence?

It seems to me "Rule 1" is a subset of "Rule 2". What the heck are they saying? I think they left something out?

It's crazy, IMO.

To continue my rant, while I understand what Midpack is saying about COVID affecting the IRS ability to get everything updated, I've said in other posts that I view my tax obligation as a "contract" between me and Feds. I feel I have every right to expect that contract to be finalized and in writing, with all forms complete on Jan 1 of the tax year. Otherwise, it's like starting a job w/o a contract, and writing it on the fly, as the job is being done. I know it's not gonna happen, but that is how I feel about it.

Thanks again. -ERD50

 

[ERD50]

....

4. Roth IRA inheritance spouse and non-spouse. These are the same as the traditional IRA above (ERD50 NOTE - deplete within 10 years, on any schedule) The only difference is that the distributions do not create taxable income.
...

It seems there is a wrinkle in that, though once again, the source is not direct, there are like 3 re-directs instead of just saying it in plain English. Geez, I would think it would be easier to write it in plain English than this convoluted mess. check this out (or skip to the last two paragraphs for the question/observation):

https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

first, there is this...

Inheriting a Roth IRA

If you inherit a Roth IRA and transfer the assets to an Inherited Roth IRA, unlike the original owner, you must take RMDs. As long as the assets have been in the Roth IRA for five or more years, these RMDs can be withdrawn federally tax-free.

The skip over pre-2020, to this:

For those whom the original account owner died January 1, 2020 or after:
The 10-year rule

If you are not an eligible designated beneficiary(*1) or trust or other entity, you must withdraw all assets from the inherited IRA within 10 years.

Under the 10-year rule:

You can withdraw from your inherited IRA assets at any time, in any amount within the 10-year time-frame.
You must withdraw all assets by December 31 of the 10th anniversary year of the IRA owner's death.

As long as the account is depleted within this time-frame, the RMD penalties can generally be avoided.

Example:
Year of death: 2020
Tenth year after the year of death: 2030
Deadline for depleting the account: December 31, 2030

Note, assets withdrawn from inherited IRAs will be included as ordinary income and are taxable as such (see above for inherited Roth IRAs). This may impact your taxes significantly. Talk to a tax advisor if you plan to use this option. ...

with the note below, in faint gray,small text:

(*1 ) 1. Eligible designated beneficiaries include a surviving spouse, a minor child of the deceased owner, disabled or chronically ill individual or any other person who is not more than 10 years younger than the deceased account holder. Eligible designated beneficiaries have the option to take Required Minimum Distributions based on their life expectancy.

The line: "Note, assets withdrawn from inherited IRAs will be included as ordinary income and are taxable as such (see above for inherited Roth IRAs)." is under a general heading of "Inheriting a Roth IRA ", but I guess that was only for that one paragraph - it's not clear. But anyhow, instead of saying it "will be included as ordinary income and are taxable" as a matter of fact, and then making a reference to another section, why not just say "Distributions from Traditional IRAs will be included as ordinary income and are taxable. Distributions from Roth IRAs are not included as ordinary income and are not taxable."

Then there is that (*1) note - instead of just spelling it out, another re-direct. So now we see that spouses have the option of Required Minimum Distributions based on their life expectancy. I assume that's that table of Single Life, and subtract 1 each year?

It seems that option would allow a spouse to keep money in the Roth growing tax free for longer? I dunno, I'd need to weigh it out - you could keep it all in until the 10th year, With the life expectancy method, you'd be pulling some out over those 10 years. But if you passed after 10 years, your heirs would get another ten years to draw down the Roth? Spreadsheet time.

-ERD50

 

[SecondCor521]

Now you know why I used the word "generally" and wrote my disclaimer.

Can't Roth's be rolled over into an inheriting spouse's Roth IRA and be excused from both RMDs and the 10 year rule? I thought they could but maybe not. If so, you might be able to avoid the spreadsheet.

 

[ERD50]

...

Can't Roth's be rolled over into an inheriting spouse's Roth IRA and be excused from both RMDs and the 10 year rule? I thought they could but maybe not. If so, you might be able to avoid the spreadsheet.

It would seem like that should be the case, like a Trad-IRA, but the way I read that Fidelity link, I get the impression no.

They say you must deplete an inherited Roth in 10 years unless you are an "an eligible designated beneficiary". Then they call out " Eligible designated beneficiaries include a surviving spouse,...", and go on to say "Eligible designated beneficiaries have the option to take Required Minimum Distributions based on their life expectancy. ".

So if I take out all the indirect references and aliases, I translate that to:

If you inherit a Roth IRA from a spouse, you have two options for distributions. Neither distribution is taxed:

Option A) Deplete the entire Spousal-inherited Roth IRA in 10 years.

Option B) Take RMDs from the Spousal-inherited Roth IRA each year, based on the Single Life Expectancy Table, decreasing the factor by 1 each year.​

Does that rule about the Roth needing to have been established (is that the term?) for at least 5 years still apply to Roths inherited in 2020+ ?

-ERD50

 

[SecondCor521]

In general, I only use popular sources such as Fidelity to get a general lay of the land. I have seen too many outright errors, unclear statements, and glossing over of options or loopholes that happen to apply to me to trust them. If I want authoritative statements, I have taken to only relying on IRS.gov and the original text of the actual laws.

If you click on the "For spouses" tab at the Fidelity link you provided, it does state pretty clearly there that an option for spouses is to roll it into their own Roth IRA, at which point there are no distribution requirements. The IRS says the same thing in their Pub 590-B here: https://www.irs.gov/publications/p590b#en_US_2019_publink1000231090.

The answer to your 5-year-established question seems to be "yes" based on a cursory reading of Pub 590-B, but I'd recommend you read it for yourself based on your knowledge of your specific circumstances.