Untangling The New Required Minimum Distribution (RMD) Rules

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

Coming up today on Retire Smarter, we untangle the new required minimum distribution rules for beneficiaries. Sifting through the 260 pages of final regulations issued just a few months ago, we identify what’s important for you and your family as you consider your options on your estate and current tax situation.

Walter Storholt:

Welcome to another edition of Retire Smarter. Walter Storholt here, alongside Tyler Emrick, a CERTIFIED FINANCIAL PLANNER, and Chartered Financial Analyst with the True Wealth Design team. We have a great episode today as we try to make a little bit of sense out of those RMD rules for beneficiaries. Boy, Tyler, this has been in the works for many years, at this point. All got kicked off before the pandemic, which feels like so long ago, and they keep tweaking and adjusting this thing. That’s going to be fun to dive in with you on this topic. Looking forward to that. In the meantime though, I don’t know. We’ve officially turned the page to September and fall, and it seems like we’re heading in a good direction here, weather-wise, and enjoying this time of year.

Tyler Emrick:

No, no, it’s great. This past weekend was the first weekend of football. We’re big Ohio State fans in our family. Don’t get too much into the pro sports. I know Kevin talks about his beloved Steelers quite a bit on the podcast when he’s here, but for me, it’s all college football and our Buckeyes. Although jumping on the bandwagon of the Browns and Bengals, if any sports fans out there in Ohio, Bengals have been all right here as of late, but it doesn’t seem like either team had a great start to the year, so we’ll stick with our college teams.

Walter Storholt:

Yeah, definitely not as good of a start as Ohio State has had.

Tyler Emrick:

Fingers crossed the Ohio State can get it done this year. But yeah, spending a lot of time with the family this weekend. Watched a little football. Our weather was pretty good, but boy, fall’s going to be around the corner, so we’ll be picking up leaves and doing yard work here before you know it.

Walter Storholt:

Yeah, those good times will certainly be ahead. Have you had your first pumpkin spice latte of the season yet?

Tyler Emrick:

I have not. I have not, but in a few weeks, we have some friends coming in town from Texas and the first thing they brought up was, “Can we go to a pumpkin patch?” I was like, “Sure.” So we got the pumpkin patch scheduled and all the fun fall festivities planned, at least for a weekend here coming up. But no pumpkin spice lattes as of right now.

Walter Storholt:

At least maybe some cider is in your future, it sounds like.

Tyler Emrick:

Yes, absolutely. Absolutely. We do pumpkin bars in our family, like a pumpkin roll. Not a great calling, but my favorite desserts are some of the pumpkin… But you got to have that cream cheese icing. My wife tried to make her pumpkin bars with that frosted icing and it’s just not the same. Cream cheese is where it’s at. Not to get too random and off track, but you get me talking about food, I could do that. We’ll have a whole separate podcast.

Walter Storholt:

I’m big pumpkin pie fan, but I’m liking the sound of these pumpkin bars.

Tyler Emrick:

Oh yes, pumpkin bars. Yeah, think of pumpkin-flavored cake and then cream cheese icing on top with a little bit of pecans.

Walter Storholt:

Yeah, that’s not very hard to convince someone to eat that is it?

Tyler Emrick:

No. Trust me, I eat a few of them. I can normally get her to cook it at least a couple times in the fall.

Walter Storholt:

Nice. Very cool. We will look forward to hearing about how the pumpkin patch visit goes in a couple of weeks. In the meantime, let’s turn our attention to these RMDs. Way more exciting than going to the pumpkin patch. And rules for beneficiaries, and I mentioned, Tyler, goodness gracious, this thing’s been in the works since the original SECURE Act back before the pandemic in 2019, and it’s seen lots of changes in iterations since then. Gosh, it’s hard to… If they kept that nomenclature of SECURE Act, SECURE Act 2.0, I don’t know what this one would be. It’d be like software at this point. SECURE Act 7.11 or something like that.

Tyler Emrick:

It’s definitely getting up there.

Walter Storholt:

Yeah, they’re timing the release with each new iOS update. iOS 18s coming out, so we needed a new SECURE Act update.

Tyler Emrick:

That sounds about right. These aren’t insignificant changes. Going back to the SECURE Act in 2019, as you had mentioned, boy, they made some sweeping changes to required minimum distributions, certainly for individuals that inherit qualified retirement accounts. They changed your distribution rules that you have to follow for a lot of those individuals, and then also, today we’re going to talk quite a bit about inheriting accounts and some of those rules. But SECURE Act in 2019 also had some pretty substantial changes around normal required minimum distributions and retirement plans in general.

But the major change back then, in 2019, that we’re going to springboard off of as we look at those final regulations that were issued back in July of this year, has everything to do with this idea of changing the stretch treatment of post-test distributions for most non-spouse beneficiaries where they’re now subject to this so-called 10 Year Rule, which requires beneficiaries of qualified retirement accounts to fully distribute inherited retirement accounts by the end of the 10th year following the original account owner’s death. So no more stretching out payments over your lifetime. Ten years and you got to get that money out, which is a very, very substantial change.

Then we fast-forward a couple years from 2019, we’re getting into 2022 now. The IRS felt the need to issue some proposed regulation changes to the SECURE Act. There were some more commentary on their thoughts and the actual application of the legislation. That didn’t get passed. It was just proposed. Then now we fast-forward all the way to July, just a few months ago. They actually confirmed some of those regulations that were proposed. As we alluded to in the lead-in, 260 pages of clarification. So there’s quite a bit packed into there.

Walter Storholt:

No kidding. That’s a lot to sort through for an original document, let alone an amendment to it or an update to it.

Tyler Emrick:

Right. No, the regulations definitely introduce some more complexity to the process of tax planning around your retirement accounts. There’s no doubt about it, specifically for after the death of the original account owner. We wanted to peel back the onion on some of those pages and what we feel is important to some of the listeners. By no means are we going to be able to cover everything that are in those final regulations, but we’re going to sift through what we think is going to be important and hit some of the big highlights for you here today.

Now, before we dive too far, this wording, as with most legislation, if you’ve ever got into it, the wording can get a little bit wonky, certainly can get confusing, and some minor differences between some of the language that I’m going to be using here can matter quite a bit. I’ll do my best to be clear on what we’re talking about and who we’re actually talking about but pay special attention to that as you’re listening through here.

The terminology that I’ve kind of brought up and we’ve talked about already here is this idea of who is this affecting and why, and specifically, I think it’s important to realize that we’re zeroing in on what we call qualified retirement accounts. Think about individual retirement accounts, or IRAs, Roth accounts, things like that. These rules are not applicable to taxable brokerage accounts or savings accounts or your house or anything like that. We’re being very specific on what these rules are pertaining to. IRA accounts, Roth accounts, and any other qualified retirement account that you might have.

Now, the reason why these rules become so imperative is because they have some ramifications on your tax planning and certainly some ramifications on your estate planning and how you’re thinking through who might inherit these accounts, what might their tax situation look like, and how might these accounts affect them. For anybody who has had to handle an estate or maybe inherited some retirement accounts from loved ones, friends, family, whatever the case is, and you’re still working, and then you start having to do some of these distributions, that can throw quite a bit of a wrinkle in your tax situation. Understanding these rules will absolutely help you plan through your estate and certainly help give you some insight into maybe doing Roth conversions or the positioning of the accounts and where your money’s currently being held. That’s why it’s important. Tax ramifications and some of the estate planning lens that we’re looking through here.

Now, there are also a couple definitions that we need to know. That original SECURE Act, going back to 2019, what it did is it separated out the old group of what we call designated beneficiaries into two subcategories. Prior to 2019, normally there were what we call two groups of beneficiaries. There are what’s called a designated beneficiary and a non-designated beneficiary. Non-designated beneficiaries are things like charities, estates, non-see-through trusts. They are things that really aren’t applicable for the vast majority of us, so we’re going to forget about these non-designated beneficiaries. We’re not going to talk too much about them today. We’re going to try to focus on this idea of a designated beneficiary, which I think is going to be applicable to most of our listeners.

That SECURE Act, what it did is it looked at those designated beneficiaries and broke them into two subcategories and they said, “There’s going to be what’s called eligible designated beneficiaries and non-eligible designated beneficiaries.” What are these categories, and who falls into each? The eligible designated beneficiaries is a much more finite list, and what I mean by that is specific circumstances that qualify you to be an eligible designated beneficiary. These are individuals like surviving spouses, disabled persons, chronically ill persons, individuals that are 10 years younger than the decedent, minor children, and some see-through trust. That is the list to be an eligible designated beneficiary. If you are an individual that would fall in one of those categories and you inherit a qualified retirement account, then the SECURE Act really didn’t do much changes for you. You still have the ability to, once you inherit a retirement account, to stretch payments out over your lifetime.

Surviving spouses actually, not to add to the complexity, they have a few more options as well. We’re not going to get too far into those, but these eligible designated beneficiaries, the SECURE Act separated them out and there wasn’t much changes for them.

What we’re going to focus on is the idea of these non-eligible designated beneficiaries. That’s the second group. All I’m doing is adding “non” in front of eligible. It’s a mouthful to be able to say, but these non-eligible beneficiaries are essentially most individuals that are non-spouse beneficiaries. The vast majority of us are going to fall into this category. What the SECURE Act did is said, “If you fall into this category now you have this Ten Year Rule that you need to follow. No longer can you stretch payments out over your lifetime. You have to have your account that you inherit distributed, basically has to be zero balance, by December 31st of the 10th year after you inherit the retirement account.” Basically, you got 10 years to get that account balanced down to zero, and that was really the gist of the rule. Pretty easy. Not much that you needed to do there to comply with that. Are you following me so far, Walt? How are we doing?

Walter Storholt:

Following you so far.

Tyler Emrick:

We’ve got eligible beneficiaries and non-eligible.

Walter Storholt:

I just wish there was a better lettering here so these were easier to follow, like NDB and EDB. They just don’t roll off the tongue as easy.

Tyler Emrick:

Come on, Walter. Are you throwing some more acronyms at me here? Does our industry need more acronyms?

Walter Storholt:

We got so many, we might as well lean into it, right?

Tyler Emrick:

Fair enough. But in itself, I don’t think that’s all that complex. Most beneficiaries that aren’t spouses, okay, the vast majority of us are going to have to have any account that we inherit that’s a retirement account distributed by 10 years. Now, as you think about that, why might that be impactful? If we think about inheriting these retirement accounts, a lot of times or most of the times, especially in the case of an IRA, the individual hadn’t paid taxes on that money yet. What the IRS is essentially saying is… With the requirement that you have to have that account distributed within 10 years, they’re saying, “Now you’re going to have to pull that money out and actually pay taxes on it.”

There was no restrictions on having to pull out money each year. You could literally let that money sit and then at the end of 10 years pull it all out and then whatever balance that was would then hit your tax return and then you would have to pay taxes on it. But the idea here is the government saying, “These are really nice accounts. We don’t want you to be able to keep money in them forever. We want you to have to distribute them.” In the case of the IRA, that’s taxable to you. Certainly, if you inherit a Roth account, that’s great. Those distributions would not be taxable to you when you have to pull them out. But of course, we got to remember, what’s the benefit of having a Roth? Those earnings that you get in there are all tax-free.

Ideally, if you were to inherit a Roth prior to the SECURE Act, you could let it stay in there. You’d have small distributions. There are required minimums each year, but you could let that money sit in that Roth for the rest of your life with small distributions and let those earnings keep growing tax-free. The IRS doesn’t want us to be able to do that anymore. That’s the spirit of this law that was introduced, or this 10-Year Rule, back in the SECURE Act.

In February of 2022, when they introduced those proposed regulations that were then finalized and confirmed a few months ago, the change that they made was specifically for these non-eligible designated beneficiaries, or these individuals that are subject to that 10 10-year rule. They added one other layer of complexity. They said, “Now what we have to do is if you fall in that category and you’re under that Ten Year Rule, now we have to also look at the individual who had passed and did they pass before their required beginning date or did they pass after their required beginning date?”

Now, the terminology they use here, “required beginning date,” what they’re referring to is that original owner’s required minimum distributions. These were the age when you actually have to start pulling money out of your retirement accounts. It can be 73 to 75, depending on when you were born, currently. But if the individual that you inherited the account for passed away before they started their required minimum distributions, or said another way these required beginning date, then you have the Ten Year Rule only. However, if the individual you inherited the account from was actually over 73, 75, or potentially even a little bit younger in some random circumstances, and they were actually pulling out those required minimum distributions and then they pass, now what happens is you still got to follow this Ten Year Rule. However, you’re going to actually have to start doing required minimum distributions during that 10 years. Each year, you actually are going to have a small amount that you’re going to have to distribute from these qualified retirement accounts. Then you still, on the back end, within 10 years, you have to have that account zeroed out and have a zero balance.

They added in that other niche saying, “We’re not going to let you stretch it over 10 years and do zero payments over that time period. You’re going to have to do some required minimum distributions, and then also at the end of that 10 years, you’re going to have to have the account balance at zero.” So added in another layer of complexity there.

Walter Storholt:

Yeah, it’s like an onion. Just keep peeling back the layers to these rules.

Tyler Emrick:

Yes, and on the show notes, Walt, you can see we got this-

Walter Storholt:

I’m looking at this chart, man.

Tyler Emrick:

IRA beneficiary tree. Yes. I think it’s, what, four layers down, five layers down, depending on your circumstances here. You really need to make sure that you understand what your situation is and what options are going to be afforded to you if you inherit one of these accounts. Certainly, for individuals that are going to have a substantial estate, or not even necessarily a substantial estate, but a decent amount of money that’s going to pass through their estate through these qualified retirement accounts, there’s going to be quite a bit of planning opportunity here as we think through the effect of this new rule that was confirmed.

The thing is, well, when does this start? When they did these regulations, essentially they said, “We’re already a handful of years in here. When are these required minimum distributions going to actually need to begin for these non-eligible designated beneficiaries?” That will go into effect starting next year, in 2025. They’re not going to backdate any of those required minimum distributions for ’21, ’22, ’23 and ’24. This is going to be effective starting in 2025. Now, just because those required minimum distributions are going to start in 2025, that doesn’t reset that ten-year clock for a beneficiary who inherited that retirement account between 2020 and 2023. Your 10 years is still going to go from that original date. It’s just saying, “Now, in 2025, you’re going to have to start pulling out required minimum distributions from that inherited retirement account.”

The big caveat there, that is the big rule change that we wanted to express and make sure that listeners were aware of and had it on their radar, certainly, as you’re talking to your financial professional and you kind of think through like, well, how does this affect our estate plan or certainly, if you’re an individual that has one of these inherited retirement accounts that you’ve gotten in the last few years, understanding, “What are the new rules that I need to follow starting in 2025?” And just being prepared, then that’s going to be key. If you have these required minimum distributions and you do not take them, of course, we might be looking at penalties and the like if we don’t get them out of the account.

As we had mentioned here, many, many pages and the finalized regulations, there were a handful of other things that I’d like to bring up that are off to the side, that are maybe a little bit of one-offs that I feel would be helpful for some of the listeners and might apply to someone listening. The first of which is the idea of a surviving spouse and what your options are when you inherit one of these qualified retirement accounts.

Of course, being a spouse, you actually have even more options than what we’ve dove into today. But they introduced this concept which had some pretty significant opposition, this concept of hypothetical required minimum distributions. What this is is the idea that to the extent the surviving spouse initially uses the Ten-Year Rule, surviving spouses don’t have to, but there are some circumstances where it might make sense. But if they start out saying, “We’re going to utilize this Ten Year Rule and that’s what we’re going to follow,” and then the surviving spouse later decides that, “Nope, I’d actually like to treat the deceased spouse’s IRA like my own. Just move it over into my own retirement account.” This is what’s called a rollover. Then first, they need to make up any of those required minimum distributions that would’ve had to have been taken, hypothetically, in their IRA all along.

This is again getting back to that quirkiness that the spouses have a few different options as they think about inheriting accounts from their spouse. This rule is there to circumvent some of the playing of, “I don’t have to take required minimum distributions.” Maybe you’re of a certain age to where if you were to move them over into your own retirement account, you would be subject to required minimum distributions because you are over, say, 73 or 75. This little hypothetical RMD language there is trying to prevent individuals from saying, “I’m going to go Ten Year Rules, no RMDs for that time.” And then at the end of the Ten Year Rules, roll it over into their own IRA and avoid those RMDs that would’ve been required if they had them in their own account, under their own name.

A little bit of quirkiness there, but I think that’s going to impact some individuals on maybe how they’re utilizing their inherited accounts from a spouse. The other thing that I would like to bring up is this idea of what’s called successor beneficiaries. This is a situation where you are the beneficiary of a beneficiary account, so we’re going even down another layer.

Walter Storholt:

I told you, an onion.

Tyler Emrick:

Yes, absolutely. A family member inherits account from their parents, and then that family member passes, and then you inherit that account from them. This is that situation. It’s called successor beneficiaries. Boy, there’s quite a bit of complexity here and a lot of what-ifs, so the decision tree on this one is substantially larger than even the one that you’re staring at, Walt, for our general one to start our discussion.

But there are a couple blanket statements that can be made about these rules for these individuals. Now, assuming that the original beneficiary died after the SECURE Act effective date, these two rules are… If the original beneficiary was stretching distributions, then the successor beneficiary will become subject to the Ten-Year Rule. Second one is if the original beneficiary was subject to the Ten Year Rule, then the successor beneficiary will finish out the original beneficiary’s ten-year period so it doesn’t start a new period. If they inherited an account, they were under the Ten Year Rule, five years in, they pass away and you inherit that account, then you’ve got five years left to get it out. It’s not like you have a new clock or a new ten-year period to get it out. Unique circumstances, a couple of unique situations here, but a little bit of change from what was in the past.

Walter Storholt:

That family tree is looking like one that’s had a lot of divorces and remarriages. It’s getting a little complex.

Tyler Emrick:

It can get complex, right?

Walter Storholt:

Yeah.

Tyler Emrick:

Yes, it can get complex pretty quickly. The final one I want to bring up is this idea of the RMD age. We’re changing gears a little bit. Everything that we talked about before was really focused on inheriting accounts, but of course, there are required minimum distributions for individuals in your own personal retirement accounts. And of course, Congress was rushing to pass that SECURE Act 2.0 on the closing days of 2022. That was the second iteration, the 2.0, of the original SECURE Act back in 2019. They let a significant drafting error slip through on the final vote, and the law’s provision had a step-up age for required minimum distribution. It went from like 72, they pushed it out to 73, and then eventually to 75. But they accidentally specified that people born in 1959 would be required to begin RMDs at two ages, 73 and 75.

Talk about confusing, Walt. “I have two ages when I actually have to start pulling out money. Which is it?” They actually clarified that and said, “Individuals that were born in 1959 will actually be required to begin RMDs at the age of 73.” That had some finite to it, and now we have some clarity. As you’re thinking about your own situation, if you’re retired and you’re coming up on RMD age, over the last handful of years here, there’s been some changes to that. RMD age used to start at 70 and a half, but now-

Walter Storholt:

It very quickly went from 70 and a half to several other ages in the past few years.

Tyler Emrick:

It did. It did. So to simplify that for the listeners here, essentially, under the new rules, if you were born in 1950 or earlier, 72 would’ve been your RMD age. If you were born from 1951 to 1959, 73 is your required minimum distribution age. Then of course, if you were born in 1960 or later, then your required minimum distribution age is age 75. That’s what we’re working with now, Walt, until they decide to make some other changes down the road.

Walter Storholt:

Yeah, hopefully they settle on that for a little while, because it was getting a little annoying when it was 70 and a half and then 72, then 73, then 75. Let’s settle on a number for a while here, folks.

Tyler Emrick:

Yeah, and it’s a big planning opportunity. You start looking at some of these projections and these plans and you look at individual situation now and then fast-forward to when these required minimum distributions begin, a lot of families are shocked a little bit to see how much the distributions have to be and how it affects their tax situation at that time. It’s hard to think that far down the road and what are the real dollars and what is this impact going to be for you, but when you see it visually, which we go through with a lot of the families that we work with, it really can give you some insight.

Of course, we don’t know what’s going to happen with tax legislation, but we can use our best guess and use what’s under current law and these required minimum distributions when you have to begin them, especially for individuals that have large retirement accounts that they have not paid taxes on yet. It can be pretty impactful, and we try to do quite a bit of planning around that.

As I think about what we covered today and thinking through beneficiaries and inheriting some of these accounts, whether it’s you that inherit them or family members that’ll inherit accounts from you, that same problem arises. When you start thinking about inheriting these accounts and having to do distributions, how does that impact your tax situation? Are there things that you can do now to give good old Uncle Sam the least amount of money as possible? Certainly within the rules, but no reason to give them more than their fair share.

Walter Storholt:

Pretty impressive. Thanks for reading that 200-plus pages for us, so we didn’t have to. I really, really appreciate you saving us some time.

Tyler Emrick:

Always fun.

Walter Storholt:

Some of the highlights from that legislation, and as you said, I’m sure there will be another update in the future that we’ll have to break down again here on the show. Hopefully not, but maybe that’ll be.

Tyler Emrick:

They keep us on our toes, for sure.

Walter Storholt:

Yeah, they do. They do. If you’ve got questions for Tyler, you want to get in touch, and talk a little bit about maybe RMDs that you’re facing. Have you planned properly for them in the future? If not, get in touch with Tyler and the team at True Wealth Design. A couple of ways that you can get in touch pretty easily. One is to go to truewealthdesign.com, click on the “Are We Right For You” button, and that lets you schedule an introductory call. It’s just a 15-minute conversation or so with an experienced advisor on the team, see if you’re a good fit to work with one another, and then take the conversation from there. Again, you can sign up for that at truewealthdesign.com and click the “Are We Right for You” button.

You can also call 855-TWD-Plan. That’s 855-TWD-Plan, and we’ve put all the contact info you need in the description of today’s show so you can find it easily. Tyler, great episode today. Thanks for the insight, and we’ll catch up with you again soon.

Tyler Emrick:

You got it. Have a good one, Walt.

Walter Storholt:

All right, take care. That’s Tyler Emrick. I’m Walter Storholt. Thanks for joining us. We’ll see you next time on Retire Smarter.

Speaker 3:

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