Background

The SECURE Act was enacted in 2020 and made many changes to retirement plans such as 401(k)s and other defined-contribution plans (including traditional IRAs). For example, the law increased the age at which participants must being taking RMDs from 70.5 to 72 years, referred to as the required beginning date.

Most notably, the SECURE Act eliminated the old “stretch IRA” rule for designated beneficiaries of inherited retirement plans. The law implemented the new “10 Year Rule” which instead requires a designated beneficiary (as defined in Internal Revenue Code Section 401) to distribute the entire amount of an inherited retirement plan by the end of the 10th year after the original account owner’s death.

Despite the SECURE Act being enacted in 2020, the Department of the Treasury and the IRS have failed to release final regulations interpreting the new law. Accordingly, many practitioners have needed to follow their own interpretations. For instance, many practitioners believed that the 10 Year Rule allowed a designated beneficiary to wait until the 10th year to liquidate the inherited plan.

However, the IRS’s proposed regulations in February 2022 reached a different conclusion. The February proposed regulations instead suggest that a designated beneficiary of an inherited plan must begin taking RMDs starting the year after the participant’s death, whether the participant died before or after the required beginning date. Further, the proposed regulations provide that if an employee dies after RMDs have begun, the employee’s remaining interest must be distributed “at least as rapidly” as the distribution method used by the employee as of the date of the employee’s death.

Thus, the February proposed regulations provide that beneficiaries, subject to the new law, would need to begin taking RMDs in the year after death and cannot wait to take a lump sum in the last year before the 10-year period expires. This means affected beneficiaries should have taken RMDs in 2021 and 2022, and those that did not were technically not in compliance and would owe a 50% excise tax under Internal Revenue Code Section 4974.

IRS Notice 2022-53

As a result of this confusion, Notice 2022-53 was issued. The notice clarifies that the IRS intends to issue final regulations relating to RMDs that will apply no earlier than 2023. The notice also confirms that in the case of an employee who dies after the employee’s required beginning date with a designated beneficiary, annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.

To the extent a designated beneficiary did not take the specified RMD in 2021 or 2022, the IRS will not impose the 50% excise tax under Internal Revenue Code Section 4974. Additionally, if a taxpayer has already paid the excise tax for a missed RMD, the taxpayer can request a refund.

Conclusion

For years 2023 and on, affected taxpayers must be sure to follow the RMD rules outlined in the February proposed regulations and Notice 2022-53. While many more SECURE Act questions remain, the forthcoming final regulations should resolve the uncertainties that have been building over the last three years.

For more information or assistance regarding these regulations, please reach out to request a consultation, call us at 216-696-1422, or visit Kyle’s bio for his contact information to reach out to him directly.

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• The maximum amounts individuals may contribute to their Code §401(k), §403(b), and most other §457 plans increased by $2,000, to $22,500
• The limit on annual IRA contributions increased by $500, to $6,500
• The IRA catch-up limitation for taxpayers aged 50 or more years, remains at $1,000
• The catch-up contribution limit for taxpayers aged 50 or more years who actively contribute or participate in a Code §401(k), §403(b), or most other §457 defined plans increased for the first time since calendar year 2020, to $7,500, constituting a $1,000 increase. This means that such participants can contribute up to $30,000 to such plans, starting in 2023
• The catch-up contribution limit for taxpayers aged 50 or more years who participate in SIMPLE plans increased by $500, to $3,500
• Other taxpayers contributing to SIMPLE plans will see an increased contribution amount of $1,500, meaning they may contribute up to $15,500, starting in 2023

The Code also requires that several other retirement-related thresholds are subject to cost-of-living adjustments. Accordingly, taxpayers should be aware of the following:

• The adjusted gross income limitation for determining the retirement savings contributions credit for married taxpayers filing a joint return increased from $41,000 to $43,500
• The adjusted gross income limitation for determining the retirement savings contributions credit for taxpayers filing as head of household increased from $30,750 to $32,625
• The adjusted gross income limitation for determining the retirement savings contributions credit for all other taxpayers increased from $20,500 to $21,750
• The applicable dollar amount for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) increased from $109,000 to $116,000
• The applicable dollar amount for all other taxpayers who are active participants (other than married taxpayers filing separate returns) increased from $68,000 to $73,000
• If an individual or the individual’s spouse is an active participant, the applicable dollar amount for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remained at $0
• The applicable dollar amount for a taxpayer who is not an active participant but whose spouse is an active participant increased from $204,000 to $218,000

Further, the deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified plan and have adjusted gross incomes between $73,000 and $83,000, constituting an increase from between $68,000 and $78,000.

For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $116,000 and $136,000, constituting an increase from between $109,000 and $129,000.

For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $218,000 and $228,000, constituting an increase from between $204,000 and $214,000.

For a married individual filing a separate return who is an active participant, the phase-out range is not subject to an annual cost-of-living adjustment and remains from $0 to $10,000.

The adjusted gross income limitation for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) increased from $204,000 to $218,000.

The adjusted gross income limitation for all other taxpayers (other than married taxpayers filing separate returns) increased from $129,000 to $138,000.

The applicable dollar amount for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is between $218,000 and $228,000 for married couples filing jointly, increased from between $204,000 and $214,000. For singles and heads of household, the income phase-out range is between $138,000 and $153,000, increased from between $129,000 and $144,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

These cost-of-living adjustments present properly situated taxpayers with the opportunity to obtain the related tax benefits. Proper tax planning is important, and taxpayers are encouraged to coordinate with their professional tax advisors to ensure they are maximizing available benefits.

For more information or assistance regarding your tax planning, please reach out to request a consultation, call us at 216-696-1422.

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Coronavirus-Related Distributions

 In general, the CARES Act provides for expanded distribution options and favorable tax treatment of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) plans, 403(b) plans, and IRAs) to qualified individuals. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020 to December 31, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The additional 10% tax on early distributions under Internal Revenue Code (Code) Section 72(t) does not apply to any coronavirus-related distribution.

Qualified Individuals

A person is considered a qualified individual if:

• He or she is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC);
• The person’s spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the CDC;
• He or she experiences adverse financial consequences as a result of:
  • Being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • Being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19;
  • Closing or reducing hours of a business that he or she owns or operates due to SARS-CoV-2 or COVID-19;
  • Having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or the start date for a job delayed due to COVID-19;
  • The individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of child care due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or the start date for a job delayed due to COVID-19; or
  • Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

Reporting & Repayment

Individuals may elect to report all of their coronavirus-related distributions on their individual federal income tax returns in the year of distribution or ratably over a three-year period. Individuals may also repay all or part of a coronavirus-related distribution, provided that they complete the repayment within three years after the date that the distribution was received. For example, if an individual takes a coronavirus-related distribution and he or she chooses to repay the full amount in 2022, the individual can file an amended return for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that was included in income for those years. Further, the individual will not be required to include any amount in income for 2022. Form 8915-E is used to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year.

Plan Loans

The CARES Act also increases the amount a plan owner can borrow. Under Code Section 72(p), loans from retirement plans cannot exceed $50,000. The CARES Act increases the allowable plan loan amount to $100,000 and permits suspension of loan payments for plan loans outstanding on or after March 27, 2020, that are made to qualified individuals.

Rollover Rules

 It is anticipated that eligible retirement plans will accept repayments of coronavirus-related distributions and treat them as rollover contributions. However, eligible retirement plans are not required to accept rollover contributions and plans that do not currently accept rollover contributions are not required to change their terms or procedures to accept repayments.

Required Minimum Distribution Rules

The CARES Act enables any taxpayer with a required minimum distribution (RMD) due in 2020 to skip those RMDs for this year. Further, taxpayers who already took an RMD for 2020 have the opportunity to roll those amounts back into the retirement account. The deadline to roll over such a payment is now August 31, 2020.

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