Secure Act 2.0 rewind, Age 72 b-day in 2023 receives a one year RMD deferral

catch22

The Secure Act 2.0 has been discussed here, but during the busy holiday period; so I'm placing this review.
In particular, for my emphasis, the immediate below for IRA RMD's. While you or yours may not turn 72 in 2023, you may know someone who is.....so, pass this along, as many are unlikely aware of the change for RMD's. The link below reviews Secure Act, 2.0.


*** The age at which owners of retirement accounts must start taking RMD's will increase to 73, starting January 1, 2023. The current age to begin taking RMDs is 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts. Two important things to think about: If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. If you're turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan.

Review of Secure Act 2.0 legislation passed in December, 2022. Note: One may reject 'all cookies' and still read the article.

Remain curious,
Catch

yogibearbull

For those interested, I have collected some info related to SECURE 2.0 here (repeated).
https://ybbpersonalfinance.proboards.com/thread/380/secure-act-2-2022

Derf

My question , will you be taking RMD earlier or later if reguired ? Help to keep the Gov up & running by taking it early.

catch22

We don't provide for taxes any sooner than required by law.

sma3

Lots of misinformation out there

Schwab says "Your first RMD must be taken by 4/1 of the year after you turn 73."

This is incorrect. Many people will be 73 when they take first RMD, but it is the April 1, in the year after you turn 72.

Unfortunately their calculator was great but now

"This calculator is undergoing maintenance for the new SECURE 2.0 Act of 2022."

From IRS

"IRAs (including SEPs and SIMPLE IRAs)
April 1 of the year following the calendar year in which you reach age 72."

yogibearbull

@sma3, I do see that IRS link, but its date is 12/8/22, prior to Secure 2.0 approval. I think that it would be adjusted (when the IRS has time) to reflect the extension of RMD to 73.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

msf

I was looking at the 5498 that someone over age 73 received from Fidelity. It mistakenly read:

Our records indicate that you will be 72 or older in 2023. Once you reach age 72, the Internal Revenue Service (IRS) requires that you take a required minimum distribution (RMD) each year from your IRA(s). The deadline for taking RMDs is December 31 each year. If this is your first RMD, you have until April 1, 2024 (the year after you turn 72) to take your first withdrawal

There's a checkbox on the form that says an RMD is required for 2023. It was correctly checked.

The concern I expressed to Fidelity was that, aside from the boilerplate being wrong, that the checkbox might be mistakenly checked for customers turning 72 (not 73) this year. It's a computer-generated form, so it is possible that if the software team missed changing the text that they also missed changing the checkbox logic.

Fidelity's response was minimal and not especially satisfying: We are aware of the problem and are working on it.

There is a lot of misinformation out there. Just not necessarily the information one may think. And therein lies the problem - lots of confusion.

catch22

Thanks @msf. I recently viewed a 5498 (Fido), received by a friend, who will be 72 in 2023. The RMD box, for 2023, was not checked. I looked at the reverse of the form, too. Line 11 instructions indicates the 50% tax penalty if the RMD is not taken. This is correct per old law for someone already taking RMD, but is a bit confusing; versus the Act 2.0 penalty reduced to a 25% tax penalty.
But, this is a 2022 5498 form, so.....
Apparently, not all organizations are up to speed on Act 2.0 yet.

Graust

@yogibearbull

I got mixed signals reading the part about the 529-to-Roth IRA portion of SECURE. It appears the beneficiary has to have earned income for that year (earned income of at least $1), but the “rollover” can be done to the maximum of the beneficiaries Roth IRA contribution limit (even if earned income is only $1, as an extreme example).

A) does my question make sense?
B) is my understanding correct?

I have a 19 year old daughter who was blessed enough to have grandparents willing to pay for her college, but we were able to fully pay for her first year out of her 529. Debating on emptying it next year (likely paying for at least first semester next year) or holding on to it to rollover to her Roth. Sorry for the personal details that no one but me cares about haha

yogibearbull

Why rush to empty 529? Wait until the daughter graduates and has job. Lifetime limit on these 529 to R-IRA transfers is $35K and regular annual limits for IRAs apply.

catch22

@Graust To add to YBB's comment; this is from Lord Abbett Investment Company site:

529 plan to Roth IRA rollover – Effective in 2024, SECURE 2.0 authorizes 529 plan funds to be directly transferred to a Roth IRA tax and penalty free. Importantly, several conditions must be satisfied to be eligible: The Roth IRA receiving the funds needs to be in the name of the 529 plan beneficiary, the 529 plan must have been maintained for a minimum of 15 years, any contributions (plus earnings) to a 529 plan in the last five years are ineligible to be transferred, the annual transfer limit is the Roth IRA contribution for that year (i.e. $6,500 in 2023), and the lifetime rollover is limited to $35,000.

Perhaps to let the 'dust' settle on this legislation for the full language markup, if needed. No actions may be taken until 2024, so you have enough planning time. Further clarification will be able to be discovered at the IRS site.

yogibearbull

One clarification pending is what happens if the beneficiary is changed?

IMO, this may mess up possible transfers or 15 yr clock.

Otherwise, transfer $35K to beneficiary1, change beneficiary and transfer $35K to beneficiary2, rinse & repeat. I don't think that was the intent of Congress.

sma3

Make sure she doesn't ever want to go to graduate school or if she does Grandparents will step up again.

My son burned up last of 529 on a year of Graduate school

catch22

@sma3
Doesn't take very long to burn through the $'s for a Master's, eh?
I believe I found the correct data that indicates at Michigan State, in state resident; the tuition ranges for $1,850 - $1,000 per credit hour. Fully outrageous.
30-60 credit hours for a Master's. Serious math.

hank

Down to 21.5% left in Traditional IRA (compared to 100% when I retired over 20 years ago). Most now in Roths. Some in TOD. When you pull necessary funds from a Roth w/o the immediate tax-hit it’s kind of reminiscent of a Yogi Berra expression: ”And they give ya real money.”

The plan has been to pull mainly from the Traditional IRA annually for normal needs, saving the Roth $$ for the occasional larger needs. Whether conversions, having the up front tax hit, make sense … that’s a different matter and @msf for one has effectively, I think, cast that into doubt. Still, conversions at lower market valuations seem a good idea to me.

Lots of websites will calculate your RMD - including, I believe, some from the govt. Doesn’t hurt to do some cross-checking among sites if the amount / time periods are critical for you.

Under recent market conditions have been tilting the Roth more in the direction of growth, while fixed-income holdings and a few small equity hedges are concentrated in the traditional account. Were the equity markets to bounce hard, would probably gradually increase income-oriented component of the Roths as a defensive measure.

msf

Whether conversions, having the up front tax hit, make sense … that’s a different matter and msf for one has effectively, I think, cast that into doubt. Still, conversions at lower market valuations seem a good idea to me.

Assuming no change in tax rates, you can come out ahead doing conversions if you can pay the taxes with money from a taxable account. If the tax money comes out of a tax-sheltered account, it's a wash.

At lower valuations, you come out even further ahead if paying taxes with taxable account money. Curiously, if you're paying taxes with tax sheltered money, it's a wash regardless of whether the market is up or down.

Briefly, that's because when the value of the investment you're converting is down, so is the value of the portion of the investment you're using to pay the taxes. Still, if you want to convert a given dollar amount, lower valuations let you convert a bigger percentage of your IRA at a single time.

Also, there are other benefits to Roth conversions beyond saving money. For example, heirs (who may be younger, working, and in higher tax brackets) won't have to deal with taxes on inherited IRAs. Especially now that they have to pull everything within 10 years. Also, when you pull from Roths instead of traditional IRAs you have a lower MAGI for things like IRMAA.

hank

Thanks @msf / Your math has always been impeccable. And the idea of using tax deferred money (and paying taxes on such) to do a conversion is flawed as your math has shown before. OTOH, I wouldn’t discourage someone from doing so if they felt it met their needs. You acknowledge some other benefits.

My view on the matter is of course biased - and probably overly-simplistic. Interestingly, I’d just begun drawing SS at the time the markets tanked in ‘08, having subsided on pension alone for a few years prior. So the additional income stream was put to work converting a sizable chunk at distressed market valuations (early ‘09). Everyone should be as lucky.

ISTM there was a 1-time change in the law at the time allowing 3 years to cover the tax hit from conversions. But I might be mistaken. Research turned up only such an an extension instituted in 2010.

Crash

..... And so, OK: I'm intrigued.
Does it make sense to convert from T-IRA to Roth if current filing status puts one in "no tax due" at all bracket--- AND spouse has no reportable earned income, as well? SS and pension plus interest, cap gains and divs are my own sources of income. But those cap gains and divs. all get reinvested into T-IRA. Come to think of it, I'm re-investing all proceeds from the taxable account, too. The taxable account at the moment is up to about 11% the size of the T-IRA. (That figure includes wife's own small rollover T-IRA, too, less than $11,000 right now.) Thanks for any thoughts. These rules just all seem so arcane to me./ And there's still a small slice of my T-IRA which is non-taxable upon withdrawal, because it was deposited as non-deductible, and no tax due in that year. My tax guy is on top of that. Very conscientious.

sma3

The other new twist is you can convert up to $200,000 ( used to be $160,000 I think) or 25% of your IRA into a QLAC tax free, so you can lower your RMD. I have not dug into it yet, but I think you can pick an annuity date at anytime in the future, and one that would still return money to your heirs.

I have searched long and hard for a simple spreadsheet that would allow different iterations of this conversion question, and take into account current and future tax rates, state tax rates, estimated inflation etc and returns.

Can't find one. Anybody else have any luck?

https://maxifiplanner.com/ comes the closest but it is an all around program designed to maximize your retirement income

My daughter finally wrote a simple spread sheet that works pretty well.

I concluded IRA conversions can save a substantial amount of taxes in the long run, but you have to be willing to pay the taxes now out of your taxable accounts.

That is the hard part. Who wants to substantially increase your tax bill this year? So we chose numbers that would not push us into the next bracket. Probably should have done more

Guess I could break down and hire a financial planner but if have never been impressed.

msf

sma3 said:

The other new twist is you can convert up to $200,000 ( used to be $160,000 I think) or 25% of your IRA into a QLAC tax free, so you can lower your RMD. I have not dug into it yet, but I think you can pick an annuity date at anytime in the future, and one that would still return money to your heirs.

I feel that deferred income annuities are one of the rare positive innovations in financial services in years. But that doesn't make QLACs a great idea.

As Kitces wrote in 2015, using QLACs for the purpose of reducing RMDs, doesn't pay off. It's their value as longevity insurance, not as an RMD reduction mechanism, that makes them worthwhile.
https://www.kitces.com/blog/why-a-qlac-in-an-ira-is-a-terrible-way-to-defer-the-required-minimum-distribution-rmd-obligation/

He also suggested that the 25% limit helped people to avoid a liquidity squeeze - where they didn't have enough left in their IRA to fund retirement before their deferred annuity started monthly payments.

What SECURE 2.0 changed:
- instead of a $125K limit, adjusted for inflation (that's where the $160K figure comes from), it is reset to $200K, still adjusted for inflation;
- the 25% limit is removed
- QLAC monthly payments, once they begin, can be used to satisfy not only the RMD requirement of the annuity but also of the remaining IRA balance, potentially lowering the RMD withdrawals required of the non-annuity portion of the IRA.
https://www.klgates.com/SECURE-20-Act-Legislation-Includes-Significant-Changes-to-Individual-Retirement-Accounts-1-31-2023

What did not change:
- must start payments by age 85
- return of principal to heirs is permitted
Original QLAC regs

yogibearbull

@msf, K&LGates link is a good in that it collects various IRA related changes by Secure 2.0.

I think that QLAC, being DIA from retirement accounts, solved one RMD issue in 2014; prior to 2014 change, the DIAs from retirement accounts involved complex RMD calculations by using phantom present values and many just avoided those. All the while, DIAs from taxable (nonretirement) accounts were picking up. Now, the Secure 2.0 (aggregation of RMDs in split accounts) makes QLACs it even better in 2023.

Your last link for "Original QLAC regs" just goes back to the OP of this thread.

msf

yogibearbull said:

@msf, K&LGates link is a good in that it collects various IRA related changes by Secure 2.0.

I think that QLAC, being DIA from retirement accounts, solved one RMD issue in 2014; prior to 2014 change, the DIAs from retirement accounts involved complex RMD calculations by using phantom present values and many just avoided those. All the while, DIAs from taxable (nonretirement) accounts were picking up. Now, the Secure 2.0 (aggregation of RMDs in split accounts) makes QLACs it even better in 2023.

Your last link for "Original QLAC regs" just goes back to the OP of this thread.

Link is fixed. I truncated it when I cut and pasted, and it seems that without the complete link the browser just goes back to the current page.

K&LGates is a site I've run across a few times and seems quite solid. It's not on my top three list (haven't gone there enough times). But if it shows up in a search, i would definitely glance through the page found.

I believe by "phatom present value" you're referring to the "entire interest" (value) of an annuity inside an IRA. It's not so much that QLACs solved this problem as that they were (and are) so restricted that their meger benefits (like return of premium) were already excluded from PV calculations.

The original QLAC exclusion is described here:

When a plan account or IRA holds a deferred annuity, the account balance must include the actuarial present value (APV) of certain benefits that are not reflected in the annuity’s cash value. In the case of a DIA, which may have no surrender cash value, the APV requirement effectively precluded such contracts from being offered in the qualified plan and IRA markets. ...

On February 3, 2012, Treasury and IRS released proposed amendments to the section
401(a)(9) regulations (and various related regulations) that would facilitate the purchase of DIAs providing annuity payments that commence at more advanced ages, as long as the contract meets the definition of a QLAC in the regulations. Under the proposed regulations, the value of a QLAC held under a plan or IRA (other than a Roth IRA) would be excluded from the account balance used to determine RMDs, meaning that no RMDs would be required with respect to the contract prior to annuity payments commencing thereunder.

https://www.sparkinstitute.org/content-files/summary_of_final_qlac_regulations.pdf

Effectively, the original QLAC regulations bifurcated IRAs - there would be an annuity (QLAC) portion and a "regular" portion. The QLAC value would not be included in calculating RMDs and the monthly payments from the QLAC would satisfy the RMD requirements for that portion of the IRA. The remaining "regular" potion of the IRA would be handled normally, as if the QLAC (and its value and its payments) didn't exist.

This is what SECURE 2.0 changed. If the QLAC monthly payments exceed what the annuity value require, the excess may be applied toward satisfying the RMD requirement of the "regular" portion of the IRA. Rather than simplify calculations, ISTM that SECURE 2.0 made them more complicated (though optional).

From CCH:

The SECURE 2.0 Act of 2022 relaxed some RMD rules to make it easier to hold an annuity in an IRA. Effective December 29, 2022, the SECURE 2.0 Act eliminates the requirement to bifurcate the portion of the account holding the annuity for purposes of the RMD rules. As a result, the account owner can elect to aggregate distributions from the annuity portion and the rest of the account, which may result in lower minimum distributions.

https://answerconnect.cch.com/topic/2ce76cc47c6b1000ad2490b11c18c902026/required-minimum-distributions-rmd-from-iras

bee

From @msf quoted,

"hold an annuity in an IRA"

Teachers have had this dreadful option for years...

Variable Annuities (products) wrapped in a 403b.

Wonder if these VAs will get the same RMD treatment (relief) as QLACs?

Some teachers contribute to a mixed bag of Variable Annuities and non-VA mutual funds as part of their 403b portfolio. After retirement, the VAs get annuitized and the non-VAs often get rolled over into Traditional IRAs.

TIAA CREF Summary:

https://tiaa.org/public/pdf/Consultant_SECURE_Act_Summary_Flyer.pdf

403b QLAC:

https://businessofbenefits.com/2015/05/articles/uncategorized/the-403b-qlac/

yogibearbull

TIAA annuities within 403b are low-cost. For example, CREF Stock VA has all-in ER of 0.23% only (AUM $112 billion). Post-retirement, money can remain as-is in TIAA Traditional (like SV; current crediting rate 6.00%) and TIAA and CREF VAs, but can also be rolled into IRAs.
CREF Stock VA https://www.tiaa.org/public/investment-performance/investment/profile?ticker=268555492
TIAA Traditional - RA https://www.tiaa.org/public/investment-performance/investment/profile?ticker=47933630

There is discussion on Secure 2.0 implications at the thread below at the M* TIAA Forum. When one annuitizes from TIAA 403b, TIAA issues a separate contract for it and it isn't clear whether the money is still part of the original 403b contract (it should be, IMO). My guess is that TIAA may modify its setup to benefit from Secure 2.0; the language is very specific on split annuitized-unannuitized $s within the same account. Beware that early discussion on this M* thread was based on some erroneous info provided by Fidelity at its website; I contacted Fidelity and was informed that the info at Fidelity website has been corrected.
https://community.morningstar.com/s/question/0D53o00006OFGTRCA5/update-on-secure-act-of-2022

msf

I agree with Yogi that TIAA annuities are solid, low cost investment options. Except for TIAA Traditional, the fact that they are annuities is essentially a non-issue; what matters is the all-in cost.

Prior to SECURE 2.0, annuitized contracts (where you exchanged cash value for a promised income stream starting either "now" or "deferred" to some time in the future) were treated as separate from the remainder of your 403(b) or IRA. This is called "bifurcation".

Traditionally under bifurcation, the RMD requirement for the annuitized portion of a plan was automatically satisfied so long as payments began by age 73. QLACs were created to allow payments to begin later (up to age 85).

Here's the way Kiplinger describes it:

A DIA [deferred income annuity] can work well as an IRA, but make sure your income payments begin no later than age 72 [now 73] to comply with required minimum distribution (RMD) rules. If you want to defer income payments past that age, consider a qualified longevity annuity contract (QLAC).

https://www.kiplinger.com/retirement/annuities/604392/its-ira-season-ensure-your-assets-are-optimally-invested

This isn't changed by SECURE 2.0. What SECURE 2.0 does is allow you to disregard bifurcation. If the annuity's monthly payment exceeds the RMD of the annuity portion (I've no idea how that is calculated), then the excess can be applied towards satisfying the RMD of the remainder (non-annuitized portion) of the 403(b) or IRA.

That seems to address the "age old" question - what happens in the first year you annuitize a non-QLAC contract within a 403(b) or IRA? For a description of this question, see:
https://www.irahelp.com/slottreport/what-happens-my-rmds-if-i-annuitize-my-ira-annuity

As to whether, when one annuitizes in TIAA, the annuity contract remains within the original 403(b) plan or TIAA creates a separate plan (which would prevent applying any excess monthly payments toward the RMD of the rest of the 403(b) plan), I have no idea. TIAA does an excellent job of hiding that contract altogether. It's not listed under any 403(b) plan, and the first time I looked for it, it took me over an hour to find on the TIAA site.

FWIW, here's another M* community thread, this one specifically on Section 204 of SECURE 2.0 (the part dealing with excess monthly payments).
https://community.morningstar.com/s/question/0D53o00006PByU7CAL/section-204-excess-annuity-payment

bee

Congress passed a massive year-end spending bill that included enhancements to retirement savings known as the SECURE Act 2.0. These changes build on the SECURE Act of 2019 and address issues that were not part of the original act, with the ultimate goal of increasing retirement preparedness for Americans.

McLean is hosting a webinar to provide insight into the meaningful changes brought by this new legislation. Moderated by Brian Bass, you will hear from McLean thought leaders Wade Pfau, Rob Cordeau, and Jason Rizkallah as we discuss what has changed and what financial planning opportunities are possible due to SECURE Act 2.0.

Topics include:

Required Minimum Distributions (RMDs)

529 College Savings Plans

Qualified retirement plans - both Traditional and Roth

Charitable planning

SEP and SIMPLE Roth accounts

Employer contributions to Roth accounts

Updates to benefit retirement savings

webinar secure act 2.0

bee

@sma3,

another retirement planner...allows you to include a spouse and added parameters. It's Free.

https://i-orp.com/Plans/index.html

bee

T Rowe Price Article on the Secure Act 2.0:

troweprice.com/what-investors-need-to-know-about-secure-20-provisions