Quarterly Newsletter
Fall, 2024
Tax & Financial Planning
Recent Developments Regarding IRA and Qualified Plan Required Distributions
On July 18, 2024 the IRS issued final and proposed regulations relating to required distributions from inherited qualified retirement plans and IRAs. These regulations clarify certain aspects that have been uncertain since the provisions were originally modified by Congress.
Required Minimum Distributions (RMDs) are designed to ensure that investments in IRAs don’t grow tax-deferred forever, and the requirement of minimum distributions carries over to those inheriting IRAs upon the original owner’s death. The rules vary based upon when the owner passed away.
Original IRA owners generally must take their first RMD by April 1 of the year following the year in which they turn 73 years of age. However, if you were born before 1951 the RMD is based on age 72; and if born before July 1, 1949 the RMD is 70.5
After the death of the original IRA owner, the rules regarding distributions to succeeding beneficiary are governed by the status of the beneficiary and the date of death of the original owner. Generally, the rules are more favorable with respect to succeeding spouses as opposed to non-spouses. In all cases an RMD must be paid out in the year of death of the original owner if such amount is otherwise required to be distributed.
Generally, a beneficiary is required to liquidate the account by the 10th year following the year of death and also take an RMD in years 1-9 if the decedent had already begun taking RMDs. However, in the case of a beneficiary that is the original owner’s spouse, minor child, an individual not more than 10 years younger than the IRA owner, disabled or chronically ill (so called “eligible designated beneficiaries”), the distribution rules are more liberal. In these cases the distributions are governed by the rules in place prior to 2020, which are based on the age of the beneficiary. The beneficiary can also elect the 10-year rule, but is not required to take distributions in years 1-9.
For beneficiaries other than those noted above, generally adult children of the original owner, the beneficiary must take distributions at least as rapidly as the original owner, but the distribution is based on the life expectancy of the beneficiary (and must be fully distributed by the end of the 10th year). If the original owner of the IRA had not started taking distributions then these beneficiaries are not required to take distributions in years 1-9, but must liquidate the entire account by the end of the 10th year.
Prior to the IRS clarification it was thought by some that distributions to other than eligible designated beneficiaries, i.e., adult children, did not need to be made in years 1-9 as long as the entire balance was distributed by the end of year 10. The IRS clarified that distributions for this class of beneficiary are required in years 1-9.
It should be noted that the distribution rules are different with respect to Roth IRAs. First of all, the person who establishes the Roth IRA has no minimum distribution requirement. If the spouse inherits the Roth IRA, he or she can elect to treat it as their own and thereby avoid any requirement of minimum distributions. Failing that, the spouse can treat the Roth IRA as an inherited IRA and become subject to the requirement to withdraw the funds within 10 years (but there is no requirement for distributions in years 1-9). Non-spouse beneficiaries do not have the option to treat the Roth IRA as their own, and therefore are subject to the 10-year distribution requirement (but again not subject to the requirement of distributions in years 1-9). Finally, even if distributions are required from a Roth IRA they are not subject to tax.
Will the Trump Tax Cuts be Extended?
Besides all the other changes that may affect American's lives, there are significant tax implications associated with a change in political power as a result of the 2024 elections. The last big tax reform was in 2017 as a result of the election of Donald J. Trump and affected years 2018 forward. Unless extended by the new Congress and President, many tax provisions will revert to those in effect for 2017. Following are the key expiring provisions:
- Standard Deduction – the standard deduction presently in place will be cut by half
- Tax Brackets – the present individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35% and 37% will revert to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
- Child Tax Credit – the present credits of $2,000 for a qualifying child and $500 for dependents that are not qualifying children will revert to $1,000
- Personal Exemptions – personal exemptions were eliminated by the 2017 law; prior to this time filers could take a deduction of $4,050 for themselves and each of their dependents
- $10,000 Cap on Tax Deductions – the $10,000 cap on deducting combined state and local taxes will expire unless extended
- Cap on Home Mortgage Deductions – under the 2017 law only interest on the first $750,000 of mortgage debt can be deducted, down from $1,000,000 under the old law
- Miscellaneous Itemized Deductions – the 2017 law eliminated this category of deductions, such as un-reimbursed employee expenses, brokerage and IRA fees, hobby losses and tax return preparation fees. These deductions will be available if the law resets, but subject to a 2% of AGI threshold. Related to this, the curb on deductions for higher income taxpayers will return if this does reset.
- Qualified Business Income Deduction – this provision, allowing for a 20% deduction for self-employed people and those who own interests in partnerships, S-Corporations, LLCs and other pass-through entities will be eliminated upon a reset of the law
- Alternate Minimum Tax – the higher exemption amounts and phaseouts have resulted in this tax being a non-issue for all but the wealthiest Americans under the 2017 changes. If the law is reinstated to that existing in 2017 many more Americans will be subject to this tax
- Estate and Gift Taxes – people who die in 2024 have an exemption of $13,610,000 from estate and gift taxes; this reverts to $5,490,000 under the old law
- Miscellaneous Provisions – job-related moving expenses and theft/casualty losses would be more favorably treated under a reset of the law
Needless to say, there is a lot at stake with the potential expiration and reset of these tax provisions. This is likely to be one of the most contentious issues for legislators in 2025 unless there is full control of the executive and legislative branches by one party.
We are happy to address any questions you may have about the above strategies. Feel free to contact us by telephone or email.