IRS Updates to RMDs

[Aitrus]

I came across an article this morning that made me realize that there's been a number of changes to the RMD rules this year. It won't affect me for a while yet - I'm 43 - and it's not a section of retirement planning I keep up on as much as I should, so it caught me a bit by surprise. Posting here so that anybody who is affected can get up to speed.

https://www.fedsmith.com/2023/07/27/rmd-update-again/

It seems that the SECURE Act made some changes to inherited accounts, and the IRS issued some new rules on RMDs.

SECURE Act changes: https://www.fedsmith.com/2023/01/18/sec ... d-to-know/

New IRS Rules: https://www.fedsmith.com/2023/02/17/mas ... d-to-know/

Because of the confusion in these new rules, the IRS has issued an updated rule for 2023 (namely, a waiver), which is what the first article above is about. Apparently...

"Previous guidelines suggested that if the decedent had already begun RMDs prior to death, the beneficiary would have to continue distributions as if the decedent were still alive. Many people were getting this wrong, incorrectly assuming they just needed to have the account fully distributed by the 10th year of having inherited it. In response, the IRS released notice 2023-54 stating that due to the continued confusion, they would waive the requirement for this year."

[evilanne]

So if I die prior to 75, my beneficiaries have 10 years to withdraw the money but if I reach 75 or later it is reduced to 5 years?? I'm confused, not sure if I'm reading this right

https://www.irs.gov/pub/irs-drop/n-23-54.pdf

[Bubba]

Thanks for keeping us apprised. I'm also in my 40s, but I'm watching this stuff like a hawk. Any further updates are appreciated.

[evilanne]

This is a little clearer on non-spouse RMDs https://www.kiplinger.com/taxes/irs-end ... rited-iras
In going back to https://www.irs.gov/pub/irs-drop/n-23-54.pdf it appears that everything is 10 years for everything
"beneficiary of an employee who died after the employee’s required beginning date must take an annual RMD beginning in the first calendar year after the calendar year of the employee’s death. In order to satisfy §401(a)(9)(B)(ii) (applied by substituting “10 years” for “5 years”), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee’s death"
It seems like the confusion has been that beneficiaries are required to take RMDs in those cases where the decedent is subject to RMDs

[Bubba]

This is a little clearer on non-spouse RMDs https://www.kiplinger.com/taxes/irs-end ... rited-iras
In going back to https://www.irs.gov/pub/irs-drop/n-23-54.pdf it appears that everything is 10 years for everything
"beneficiary of an employee who died after the employee’s required beginning date must take an annual RMD beginning in the first calendar year after the calendar year of the employee’s death. In order to satisfy §401(a)(9)(B)(ii) (applied by substituting “10 years” for “5 years”), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee’s death"
It seems like the confusion has been that beneficiaries are required to take RMDs in those cases where the decedent is subject to RMDs

I've always wondered if there was a way to place my 401k upon death into an irrevocable trust fund and let that go to the family over many, many years. I don't know, however, if the TSP works with something like that.

[evilanne]

Generally it is not recommended to have a trust as a beneficiary from everything I have read it can be problematic. With the Secure Act and loss of Stretch option, i.e. the new ten year rule I think it makes less sense, but see https://www.wealth.com/resources/articl ... nt-account that has pros & cons of naming trust as beneficiary.

Another link https://www.investopedia.com/ask/answer ... iaries.asp

[Bubba]

Generally it is not recommended to have a trust as a beneficiary from everything I have read it can be problematic. With the Secure Act and loss of Stretch option, i.e. the new ten year rule I think it makes less sense, but see https://www.wealth.com/resources/articl ... nt-account that has pros & cons of naming trust as beneficiary.

Another link https://www.investopedia.com/ask/answer ... iaries.asp

Thanks! I would be curious if there's a way to do that within the TSP or if I have to do that separately from the TSP.

[evilanne]

Per TSP you can designate a person or persons, your estate, or a trust to receive your TSP account after your death. Unless there is a good reason, I don't know if it is worth the legal and accounting costs associated with the Trust.
I have.a friend that has been dealing with her mother's estate for the last couple of years. She is in the process of setting up Trust accounts for niece and nephews. Seems like a lot of extra work for the executor of the estate but I do understand concern that beneficiaries may not financially responsible or that some may not be able to care for themselves. Estates & Trusts have to issue 1041 tax return & K-1s for any distributions each year complicating tax filing.
The more I read, the more I dislike the Secure Act and the elimination of the stretch option. Unless you have an EDP, eligible designated beneficiary, that you need to provide for, i don't see any benefit. https://www.fidelity.com/viewpoints/wea ... to-a-trust
I'm not sure I understand the different types of trusts (https://www.investopedia.com/terms/s/se ... -trust.asp) but the non-see-through trust requires shorter 5 year period for distributions.

[Bubba]

Per TSP you can designate a person or persons, your estate, or a trust to receive your TSP account after your death. Unless there is a good reason, I don't know if it is worth the legal and accounting costs associated with the Trust.
I have.a friend that has been dealing with her mother's estate for the last couple of years. She is in the process of setting up Trust accounts for niece and nephews. Seems like a lot of extra work for the executor of the estate but I do understand concern that beneficiaries may not financially responsible or that some may not be able to care for themselves. Estates & Trusts have to issue 1041 tax return & K-1s for any distributions each year complicating tax filing.
The more I read, the more I dislike the Secure Act and the elimination of the stretch option. Unless you have an EDP, eligible designated beneficiary, that you need to provide for, i don't see any benefit. https://www.fidelity.com/viewpoints/wea ... to-a-trust
I'm not sure I understand the different types of trusts (https://www.investopedia.com/terms/s/se ... -trust.asp) but the non-see-through trust requires shorter 5 year period for distributions.

Yeah, the biggest problem (in my view) is the constant maintenance of someone (lawyer, CPA, etc.) for a trust. Some family did it in the past and while their children could have used it at one point or the other, the trust has always made it to where the less financially sound kids couldn't waste the money. As a result, the grandchildren get something too.

I've been toying with the idea of leaving something in a trust that can sit there and pay out over long periods of time (e.g. every 10 years) something to the trustees. Eventually the thing snowballs and becomes a massive thing for future generations. Obviously, that could always change if big changes happen in the US, so we'll see where that goes over the next 15 to 20 years.

Thanks for the feedback!

[evilanne]

https://smartasset.com/taxes/trust-tax-rates
LT Capital Gains Rate of 20% is not that terrible but tax on ordinary income is quite high where funds withdrawn from traditional funds would be.
$0 – $3,100: 10%
$3,100 – $11,150: 24%
$11,150 – $15,200: 35%
$15,200+: 37%
so putting traditional retirement funds in would not make any sense with new 5/10 year rule unless it is a charitable trust not subject to taxes. IRAs transferred into a trust have shorter 5 year period that it has to be distributed but conceptually funds could be invested in stocks then transferred by the 5 year deadline out of the Roth and then only the dividends and capital gains would be subject to capitals gain if held more than a year. I really couldn't find specific pros & cons for putting Roth in a trust
IRS publication is confusing but there may be a loophole--see https://www.irs.gov/retirement-plans/pl ... eneficiary Under Non-spouse beneficiary options

Beneficiary that is not an individual
Follow the rules described above as if the account owner died before 2020 (because the SECURE Act changes only apply to beneficiaries who are individuals)

This implies that you can use the stretch option if put into a trust. I think you need a trust attorney to figure all this out but still I think the tax rates for trusts are way too high for tIRA/tTSP. IRS publication 590(b) states

If the owner’s beneficiary isn’t an individual (for example, if the beneficiary is the owner’s estate), the 5-year rule, discussed later, applies.

Page 10 seems to comfirm loophole:

5-year rule. The 5-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death.

https://www.irs.gov/pub/irs-pdf/p590b.pdf I think some people had issues with Trust as Beneficiary during change of TSP contractors. On page 12

Trust as beneficiary. A trust can't be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death ... if all of the following are true.
1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.
3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's
benefit are identifiable from the trust instrument.
4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.
The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.

This is an interesting article, https://ceritypartners.com/insights/tru ... on%20trust. Conduit Trust are taxed at the beneficiary's tax rate while Accumulation Trusts are taxed at the Trust Rates
All of this is confusing

[Bubba]

Thanks! While I don't have enough money to use a trust, my hope is that by retirement I would be able to make use of a trust in some manner. I'm going to keep investigating this too.

Oh and if you've seen the new Cambria ETF TAX (https://www.cambriafunds.com/tax) to avoid paying taxes. It seems to be taking a different idea towards non-taxable investments. I really like BOXX.

[jimcasada]

Before my mom died, she decided to set everything up in a trust. So she got with my aunt, who was a CPA, and a book on how to do it yourself trusts. They thought they had everything set up perfectly when my mom died (she had terminal cancer), but about two years later the courts threw it all out because they said it wasn't properly filed with the county. This was after all the property was already distributed, and everything turned into a real mess after that.

[Bubba]

Before my mom died, she decided to set everything up in a trust. So she got with my aunt, who was a CPA, and a book on how to do it yourself trusts. They thought they had everything set up perfectly when my mom died (she had terminal cancer), but about two years later the courts threw it all out because they said it wasn't properly filed with the county. This was after all the property was already distributed, and everything turned into a real mess after that.

I'm very sorry to hear about that. That's terrible. Not only did your mom do the best she could, but then it seems like there was no empathy provided for what she attempted. I think it should have been considered differently if she didn't make a "good faith" effort.

Is the matter resolved now? What suggestions do you have for those that will attempt a go at creating a trust?

Thanks!

[evi1anne]

Thanks! While I don't have enough money to use a trust, my hope is that by retirement I would be able to make use of a trust in some manner. I'm going to keep investigating this too.

Oh and if you've seen the new Cambria ETF TAX (https://www.cambriafunds.com/tax) to avoid paying taxes. It seems to be taking a different idea towards non-taxable investments. I really like BOXX.

.
Tax sensitive ETFs are a good idea, I'll need to keep that in mind...makes sense for brokerage account too especially in retirement. Sold too much stock in my Mom's account in 2024, which exceeds the IRMAA bracket so her Medicare may go up for a year down the road unless the threshold increases enough. Not sure if they will catch that automatically or not since it is a 2 year delay and typically she has been way below threshold.

JimCasada, Hope your mom's estate is resolved now. Did someone dispute the trust that she set up since you mentioned that the courts threw it out? Definitely confirms that you need to get good legal advice if you are dealing with Trusts.

[Bubba]

There is a growing movement for retirees to provide their wealth transfer earlier in their lives than after death. Some are thinking about this because then A. you get to see your children enjoy what you "made" and B. your children in their late 20s/early 30s could use the money in bigger manners than at the retirement age of an older person. For example, recently, a paper came out and found one of the biggest gains a family could get is receiving an interest free loan from parents to buy a house (instead of a mortgage). This one piece, was enough to provide "dividends" throughout all of life for a young couple (note that I cannot find the paper...I did a cursory look to find it though).

Obviously not everyone will be in that position. I'm also not retired, so I cannot talk about this from experience. Yet, it is something to consider as we go into the sunset years of life.