Danny (00:15.658)
Today, we're diving deep into a topic that's been causing quite a stir in the retirement planning world. The final regulations for the Secure Act 2 .0. After what seems like an eternity of anticipation, we finally have clarity from the IRS on many of the rules surrounding inherited IRAs. These changes are significant for many of you, and I'm here to break it all down
in a way that's easy to understand and actionable. Hey there, I'm Danny Goodorf, the owner and one of the financial planners at Goodorf Financial Group. We're a retirement planning firm that helps individuals and families over 50 experience a limitless retirement. If you're just joining us for the first time, a warm welcome to you. And don't forget to hit the like and subscribe button to stay up to date
on all things retirement planning. Now, let's dive in today's topic. The Secure Act 2 .0 has changed things a lot. We will explore every detail of the new rules. And trust me, when I say pouring over 260 pages of new legislation wasn't exactly a walk in the park. But I've done the heavy lifting for you, so you don't have to.
And I know what's on everyone's mind. The burning question we've all been waiting for and we've all been asking is, are annual distributions required during the 10 year period for an inherited IRA? And don't worry, we'll get to that critical piece of information soon enough. So stay tuned to learn more about that. But before we dive into the nitty gritty of the new regulations,
It's crucial that we take a step back and lay the groundwork for what this is all about. We've discussed this in previous videos, but it's worth revisiting. Understanding the types of beneficiaries is key to grasping the new rules on inherited IRAs. When it comes to inheriting an IRA, there are two main categories of beneficiaries. We have eligible beneficiaries.
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and we have non eligible beneficiaries. Now I know what you're thinking. You're saying to yourself, Danny, what about trust and charities? You're right to ask. And yes, those are indeed other types of beneficiaries. However, for the purpose of today's video, we're going to focus solely on individual beneficiaries so that we can provide some clarity on that topic. So how do you determine
whether you fall into the eligible or non eligible category. Let's break it down. You're considered an eligible beneficiary if you meet any of the following criteria. One, you're a surviving spouse. If you're the husband or wife of a deceased IRA owner, you automatically qualify as an eligible beneficiary. Number two, if you're in a disabled individual, the IRS has specific criteria
for what constitutes a disability, which we'll touch on in a little bit more detail later. Number three, if you're chronically ill. Similar to disability, there are specific definitions for chronic illness that we'll explore. Number four, individuals less than 10 years younger than the original owner of the account.
This could be a sibling, it could be a cousin, or even a close friend who's close in age to the deceased. And number five, a minor child of the original account owner. This is where we've seen significant clarification in the new regulations, which we'll discuss as well here shortly.
Danny (04:43.306)
Now, if you don't fall into any of those categories above, you're considered a non eligible beneficiary. This might include adult children, grandchildren, or any other individuals who don't meet their criteria for an eligible beneficiary. Now that we've covered the basics of a beneficiary types, let's dive into the major updates brought about by the Secure Act 2 .0
final regulations. These changes are substantial and could have a significant impact on how you handle an inherited IRA. One of the most notable changes is inheriting a retirement account that was held with an employer, such as a 401k or 403b, rather than an IRA at the time of the owner's death.
This update is particularly relevant for those who qualify as eligible beneficiaries. Due to disability or chronic illness, if you fall into this category, you now have a new responsibility. You must provide proof of your disability or chronic illness to the plan administrator. And this is very important to do so because they have set a deadline
for submitting this documentation on October 31st of the year following the employee's death. But here's where things get a little bit interesting and potentially challenging for some. If you inherited an account from an employer in 2020, 2021, 2022, or 2023, your status as an eligible designated beneficiary is solely based
on being disabled or chronically ill, then you have a retroactive requirement. You must submit the relevant documentation to the plan administrator by October 31st of 2025. And yes, you heard that right. Even if you inherited the account several years ago, you still need to provide this proof. Now, I know what some of you might be thinking.
Danny (07:07.688)
What if I've already rolled those funds from an employer plan to an IRA? And that's an excellent question. And unfortunately, the regulations don't provide clear guidance on this scenario. My recommendation as a financial planner would be to err on the side of caution. If you're in this situation, consider providing the documentation to the original plan administrator rather than
the custodian of your new IRA. Remember, it's always better to be safe than sorry when it comes to these matters. It's worth noting that this documentation requirement only implies to employer sponsored plans like 401ks and 403Bs. If you've inherited an IRA directly, you don't need to worry about providing this proof.
Another significant update concerns the definition of what a minor child is as an eligible beneficiary. The new regulations have finally provided clarity on what it means to reach the age of majority. And according to the Secure Act 2 .0, a child is considered to have reached the age of majority when they turn 21.
This is a welcome simplification because previously there was a lot of confusion and variation depending upon the state where the child lived in and whether they were in school or not in school. Now we have clear universal standards that applies across the board and that is very helpful when it comes to the different planning options.
Danny (09:16.83)
But that's not all. The regulations have also expanded the definition of who qualifies as a child for these purposes. And a significant change, stepchildren are now included in this category. Even if they weren't legally adopted by the deceased account owner, this is a major shift that acknowledges the reality of many
of the modern family structures that we have in today's day and age. The next update that I want to cover and talk about is to address a common source of confusion. And that's how to handle required minimum distributions in the year the account owner passes away. This becomes particularly complex when multiple beneficiaries inherit fractions
of the same account. This new rule simplifies this process considerably. It states that as long as the total RMD amount is withdrawn collectively by all beneficiaries, it doesn't have to be taken proportionally. And basically what that means is if there are multiple beneficiaries, they have more flexibility in how they fulfill
this RMD obligation. For example, let's say an IRA owner passed away in July, having not yet taken their RMD for that year. If the account was split between three beneficiaries, they could decide amongst themselves how to withdraw the total RMD amount. Rather than just giving each person a third, third, and their proposal,
Scratch that.
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Rather than each having to take out their proportional share, this can be particularly helpful if one beneficiary is in a lower tax bracket or has a more immediate need for the funds. Another area where we gain clarity on is in the treatment of successor beneficiaries. A successor beneficiary is someone who inherits a count from a person who already inherited it.
from the original owner. It's an essentially when you are inheriting an inherited IRA. I know that's kind of a mouthful, but it's kind of the second level after someone has passed away. Under the new regulations, if an eligible beneficiary passes away before they've withdrawn all the money from the inherited IRA, then the 10 year rule kicks in for their beneficiary.
This means the remaining funds must be fully distributed within 10 years after the eligible beneficiary's death.
This rule can add a layer of complexity to long -term planning for inherited IRAs. So we need to be thinking about that. But it also provides a clear timeline for the final distribution of these accounts. The IRS has made significant changes regarding the separate account rule and how it applies to trust. So we'll talk a little bit about how that affects
your trust -based plans that have inherited IRAs.
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Previously, if a trust was named as the beneficiary of an IRA, it could create complications in terms of what the distribution rules were. Now, under certain conditions, a single trust can be treated as separate accounts for different beneficiaries. Let's look at an example to illustrate this point. Imagine a trust is named as the beneficiary of an IRA.
and the trust stipulates that 50 % goes to the spouse, 25 % goes to a healthy adult child, and 25 % goes to charity. Under the new rules, as long as the trust splits into sub -trust immediately, each beneficiary can use their own poath, scratch that.
Danny (14:25.488)
Each beneficiary can use their own post -death rules for distributions. This change allows for more flexibility in estate planning and can potentially lead to more tax -efficient distributions.
Lastly, but certainly not least, let's talk about penalties. Before the Secure Act, if you missed an RMD and you were looking...
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Before the Secure Act, if you missed an RMD, you were looking at a hefty 50 % penalty on that missed RMD. That meant if you were required to take out $10 ,000 and missed it, even by a day, you owed the IRS $5 ,000. It was a steep price to pay for what often could be an honest mistake or just a miscellaneous oversight.
The good news is that this penalty has been reduced significantly. Under the new regulations, the penalty for a missed RMD has been lowered to 25%. But it gets even better. This penalty can be further reduced or even waived entirely under certain circumstances. If you can demonstrate to the IRS that you've missed the RMD due to a reasonable error,
and that you're actively working to rectify the situation, they may be able to waive the penalty altogether. This shows a more understanding approach from the IRS, recognizing that mistakes do happen. And even with the best intentions, we can not have the clearest form of our distribution rules. So furthermore,
If the missed RMD was simply a timing issue, maybe you forgot or miscalculated the date and you correct the shortfall by taking out the missed amount and then report it to the IRS within what they're calling the correction window, the penalty is further reduced to just 10%.
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Now what's exact scratch that.
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Now, what exactly is this correction window? It ends at the earliest of these three events. Number one, when the IRS sends a notice about the deficiency. Number two, when the IRS addresses the tax that's due. And number three, the last day of the second year after you missed the RMD. This means you potentially have
up to two years to correct a missed RMD and benefit from that reduced 10 % penalty. It's a much more forgiving system that allows for human error without imposing those significant penalties. All right, now that we've covered the major updates from the IRS guidance on the Secure Act 2 .0, let's dive into
the rules for required minimum distribution. This is where things get a bit complex. So I'll break it down as clearly as possible. So if you're an eligible beneficiary, your options depend on when the original account owner died in relation to what the IRS calls the required beginning date.
and will use RBD to mean the required beginning date. The RBD is the date when the original account owner was required to start taking their RMDs. If the decedent died before their RBD, you have two options to do. You can stretch the IRA out over the course of your lifetime
taking RMDs based upon your own life expectancy. Alternatively, you can choose to follow the 10 year rule, which we'll discuss in more detail shortly. But if the decedent died on or after their RBD, in this case, you can also stretch the IRA over your lifetime.
Danny (19:31.536)
This often allows for smaller annual distributions and potentially lower tax implications. For non eligible beneficiaries, the rules are going to be a bit different and have been a source of confusion because let's face it, most of the people who are inheriting IRAs besides a spouse are going to be non eligible beneficiaries. So let's clear this confusion up.
If the decedent died before their RBD, you must follow the 10 year rule. This means the entire account must be depleted within 10 years of the original owner's death. If the decedent died on or after their RBD, this is where it gets tricky. You still have to follow the 10 year rule.
but you also need to take those annual RMDs during the 10 years. So let's address the question that's been on everybody's mind. Are annual distributions required during the 10 year rule? And the answer to this, now that we have clarification on the final regulations from the IRS is yes, but it's with a caveat.
annual distributions are required during the 10 -year rule if the death occurred on or after the original account owner's required beginning date. However, and this is important, this rule won't actually come into effect until next year. So this year when we're recording this video, it's 2024. So next year will be 2025.
So to be absolutely clear, no RMDs are required during the 10 -year rule for the years following 2021 through 2024. But here's a word of caution. Just because you're not required to take an RMD during these years doesn't necessarily mean that you shouldn't. Waiting until the end of the 10 -year period
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to withdraw all the funds could result in significant tax consequences. You might find yourself taking out large amounts in the final year, potentially pushing yourself into a much higher tax bracket than if you had strategically spread out those distributions over time.
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All right, to clarify this, let's break this down with an example. Suppose you inherited an IRA from an 80 year old relative in 2021. In this case, no RMDs were required in 2022, 2023, or 2024. But you'll need to start taking those annual RMDs from 2025 through 2030. The account must be completely empty
by 2031. It's crucial to note that even though these RMDs weren't required in the earlier years, those years still count towards your 10 -year period. Given these complex rules, it's more important than ever to have a solid plan in place when it comes to dealing with an inherited IRA. So I want to kind of go through a few considerations that you might want to be thinking about.
Number one, tax planning. Spreading out distributions over time can help manage your tax liability. Consider your current and future tax brackets when planning on deciding when to take those withdrawals. Number two, coordination with other income sources. If you're still working or you have other income sources, this may be a big factor in deciding
how much you want to withdraw each year from the inherited IRA. And number three, estate planning. If you're an eligible beneficiary with the option to stretch the IRA over your lifetime, consider how this fits into your overall tax and estate plan. And then number four, Roth conversions. Depending upon your tax situation, it might make sense to convert
some or all of your traditional IRAs to Roth IRAs. This could be particularly beneficial if you have or expect to have a higher tax bracket in the future.
Danny (24:57.898)
So I know we've covered a lot today and these new regulations can seem overwhelming. The rules surrounding inherited IRAs are complex and the recent changes have added new layers that we must consider. But understanding the rules is crucial for making an informed decision about your inherited IRA accounts. Remember, while the new regulations provide more clarity,
They also introduce new responsibilities and deadlines, especially for certain types of beneficiaries. It's always a good idea to consult with a financial advisor or tax professional who can help you navigate these rules based upon your specific situation. If you have questions or need help understanding how these rules apply to your specific situation, please do not hesitate to reach out.
And if you want to avoid costly errors when it comes to your required minimum distributions, which let's face it, can be a minefield of potential mistakes, make sure to check out our other video on the top 10 RMD mistakes to avoid. It's packed with crucial information that could save you from headaches and potential thousands of unnecessary taxes and penalties. Once again, I'm Danny Goodorf.
the owner of Gudorf Financial Group. And if you want to see how we help our clients make the most out of their retirement, visit us at www.gudorffinancial.com/getstarted. This is where you can schedule a 20 minute call with someone on our team to get started with your free retirement assessment. Well, I appreciate you joining me today and have a great day