by Melanie A. Iverson Kaufman
The final regulations for the SECURE Act became effective on September 17, 2024. The SECURE Act, first passed in December 2019, made sweeping changes to how retirement accounts are administered. The final regulations answer some of the outstanding questions that remained after passage of this landmark legislation. While the entirety of the Act and the regulations could fill a book, the following highlights should prove practical for our Generations clients.
1. Required Age to Begin RMDs: IRA and qualified plan owners must take “required minimum distributions” (RMDs) after reaching the applicable age and for every remaining year of their lives. Before the SECURE Act, plan owners were required to begin taking minimum distributions after turning age 70½. After the SECURE Act, and pursuant to the final regulations, the ages to begin RMDs have been adjusted as follows:
a. For people born on or before June 30, 1949, age 70½.
b. For people born between July 1, 1949 and December 31, 1950, age 72.
c. For people born between January 1, 1951 – December 31, 1959, age 73.
d. For people born on or after January 1, 1960, age 75.
For employer-maintained plans, these ages only apply if the participant has retired from employment.
2. Some Relief for Excise Tax on RMD Shortage: In general, an excise tax is imposed on a payee if an RMD is not taken, or is less it should have been, in a given year. Previously, this excise tax was 50% and was very difficult to waive. There is a bit of relief under the new regulations, which provide instead for a 25% excise tax, and provides for waiver of the tax (sometimes automatically) under certain situations.
3. Definition of Minor Beneficiaries: A minor child beneficiary of a plan participant is one class of beneficiary that can take RMDs based on their life expectancy. The final regulations clarify that the definition of minor child for these purposes includes a stepchild, an adopted child, and an “eligible” foster child.
4. Timing of Payments under the 10-Year Rule: There are several categories of retirement account beneficiaries who will be required to receive the entirety of the retirement account funds within ten years of the plan owner’s death. When SECURE was first passed, it was largely believed that beneficiaries with the ten-year deadline could wait until the tenth year to take distributions if they wanted to. In other words, they were not required to take annual distributions. However, the IRS later clarified that under the ten-year rule, annual distributions are required. This left many people wondering if they would be penalized for not taking annual distributions when they should have. The final regulations state that those who missed RMDs under the ten-year rule for the years 2021-2024 will not be penalized for not taking those RMDs. However, they are required to begin taking their RMDs in 2025.