This bulletin serves as an overview of current federal legislation that is not (yet) law. The intention is to provide financial professionals with insight into new rules that could impact client retirement planning if they went into effect.
- Financial professionals can familiarize themselves with recent happenings in Washington that could impact client planning
- SECURE Act 2.0 moves through Congress with new rules that might affect retirement planning
- President Joe Biden released his 2023 federal budget request, which includes numerous new tax proposals
- New proposed beneficiary RMD regulations will bring needed clarity for financial professionals
A lot has happened recently in Washington, D.C. affecting the future of people’s income taxation, retirement savings and beneficiary planning.
SECURE Act 2.0
The U.S. House of Representatives approved House Resolution 2954, the Securing a Strong Retirement Act of 2022 — commonly referred to as SECURE 2.0 — on March 29, 2022. The next step for the legislation is for the House and Senate to work together to reconcile the bill, which has strong bipartisan support. Final passage is expected in the fourth quarter of 2022. Some key individual planning provisions of the House version of SECURE Act 2.0 are:
Expansion of the IRA QCD rules to CGAs and CRTs
- Qualified charitable distributions (QCDs) can be made from an individual retirement account (IRA) or annuity to a charity and be excluded from income up to $100,000 annually for those over age 70½.
- The legislation expands the QCD provision to allow for one-time distributions to charities through charitable gift annuities (CGAs) and charitable remainder trusts (CRT), subject to a limit of $50,000 (indexed) and the overall annual $100,000 limit.
Increase in beginning age for RMDs to age 73, then to 74, and ultimately to age 75
- Under the current required minimum distribution (RMD) rules, participants are generally mandated to begin taking distributions from their retirement plan or IRA at age 72.
- The bill would increase the RMD age from 72 to 73 in 2023, to 74 in 2030 and ultimately to 75 in 2033.
Indexing IRA catch-up contribution limit
- Under current law, the limit on IRA contributions is increased by $1,000 for individuals who have attained age 50 but is not indexed to allow it to increase each year.
- The bill would index the catch-up limit in the same way as the regular IRA contribution limit.
President Biden’s Budget Request for 2023
President Joe Biden released his 2023 federal budget request on March 28, 2022, and there are numerous new tax proposals in this budget request. One of the most significant is increasing the top marginal income tax rate from 37% to 39.6%.
The higher rate applies to:
- Married couples filing together with taxable income over $450,000
- Heads of household above $425,000
- Single filers making more than $400,000
- Married taxpayers filing separately making over $225,000
- Creating a “billionaire minimum tax,” a 20% income tax rate for the top 0.01% of earners and families with wealth exceeding $100 million.
These proposals may be difficult to pass in Congress, according to media reports.
Beneficiary RMD Proposed Regulations
In late February, the Treasury Department released proposed regulations to clarify many of the beneficiary RMD rules that were put in place by the original SECURE Act, which was passed in December 2019. These proposed regulations are open for comments for the next several months and will then be published as final regulations later this year.
A few key clarifications to the SECURE Act’s beneficiary payout rules for IRAs from the proposed regulations are:
SECURE Act Beneficiary Payout Ground Rules
- A designated beneficiary (DB) can be a person or qualifying (i.e., see-though) trust that cannot be considered an eligible designated beneficiary (EDB).
- DBs have until the end of the 10th year following the owner’s death to liquidate the entire inherited IRA.
- EDBs may use their life expectancy to take out required distributions from an inherited IRA instead of the 10-year rule.
- EDBs are those individuals who are any of the following:
- Surviving spouse of the account owner
- Minor child of the account owner
- Disabled on the owner’s date of death
- Chronically ill on the owner’s date of death
- Less than 10 years younger than the deceased owner
10-Year Window Plus Annual Distributions When Owner Dies On or After Their RBD for Designated Beneficiaries
- Distributions are required to be made annually to the DB during the 10-year payout period when the owner’s death occurs after their required beginning date (RBD).
- The owner’s RBD is April 1 of the year following the year they turn 72.
- The DB uses the greater of their life expectancy or the owner’s life expectancy to calculate the annual payments in years 1 through9, then must liquidate the entire inherited account by December 31 of the 10th year after the account owner’s death.
- Annual payments must begin by December 31 of the year after the year of the owner’s death.
- The DB must also take the owner’s year of death RMD or any remaining RMD amount the owner had not taken prior to their death, based on the owner’s life expectancy, by December 31 of the year of the owner’s death.
10-Year Window Only When Owner Dies Prior to Their RBD for Designated Beneficiaries
- Distributions are not required to be made annually to the DB during the DB’s 10-year payout period when the owner’s death occurs before their RBD.
- The DB must receive a distribution of the entire inherited account by December 31 of the 10th year after the account owner’s death.
- This rule applies to both inherited pre-tax IRAs and inherited Roth IRAs.
Age 21 is the Year of Majority for Minor Beneficiaries Taking Life Expectancy Distributions
- The minor child of the account owner is considered an EBD and can take life expectancy distributions.
- The proposed regulations define the age of majority as 21 for the purposes of applying this rule.
- The entire inherited IRA must be liquidated by the end of the year the beneficiary turns 31 or the 10th year after their death, whichever is earlier.
- Life expectancy distributions must be taken, every year, including in the years after the beneficiary reaches age 21, until the entire inherited IRA is liquidated under the rules in bullet three.
There’s still more to come on each of these changes. Check back here at the NF Advisor blog for more information on these and other important events in our industry.