June 01, 2021
IRS Publication on the Secure Act 2021
The IRS made a recent publication about The Secure Act that made us scratch our heads.
So, what is The Secure Act?
The Secure Act became law last December 2019.
The Secure Act pushed the Required Minimum Distribution age from 70½ to 72.
If you inherit a pre-tax account you have to pull all the money out within 10 years.
Everyone understanding of The Secure Act was that you don’t have to take out Required Minimum Distribution every year.
However, the IRS recently issued a publication where they said, RMD’s would be required from years 1 through 10, and all taxes will have to be paid by year 10. It is not like as everyone understood previously, where you can pay zero from years 1 through 9, and then in year 10, that’s where you have to liquidate everything. Now what they’re saying is that you have to do an RMD base on your age.
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Episode Transcript
The Importance of the Secure Act
Hey, this is Chris Berry, and today we’re going to talk about the Secure Act and how the IRS made a recent publication that has all of us scratching our heads a little bit. If you like this information, please make sure to subscribe to our YouTube channel.
Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning, and has authored the Amazon best selling book, The Caregiver’s Legal Guide.
So, what is the Secure Act and why is this important? Well, the Secure Act recently passed, was passed in December of 2019, which seems like a lifetime ago. The Secure Act did a couple of things, and if you have IRAs or 401ks, pre-tax dollars, this is very important to understand. What the Secure Act has done is it’s pushed back the required minimum distribution age. So, the age where you have to start taking money out of those pre-tax accounts, pushed it back from 70-and-a-half to 72. So, now it creates more space before you’re forced to pull money and pay tax on these pre-tax accounts, like your traditional IRAs and 401ks. And then, the big thing the Secure Act did is not just push back the RMDs age from 70-and-a-half to 72, but says that if you inherit an IRA or a pre-tax account, like a 401k or even Roths, you have to pull all the money out within a period of 10 years.
IRA
So, prior to the Secure Act passing, if you were to inherit an IRA, you could stretch out the tax payments over your lifetime. You would have what’s called a required minimum distributions based on your age. And if you’re young and a grandchild, let’s say you’re leaving money to a grandchild, it used to be a great way to leave money in a tax efficient manner because the required minimum distribution for a young child might be 1%. But if the account is growing at two or three percent it’s creating this pension almost, right?
But what the Secure Act said, is that it limited the stretch IRA only to 10 years. So, now you can’t stretch it over your lifetime, all the taxes have to be paid within 10 years on these accounts now. And so, everyone’s understanding of the Secure Act was that you didn’t have to take out RMDs every year. You didn’t have to take it out in equal payments over the 10 years, but just within 10 years, the account had to be liquidated and the taxes had to be paid. So, that was everyone’s understanding and reading of the Secure Act. However, just a couple days ago, the IRS issued a publication and a clarification, where they said that required minimum distributions would be required from years one through 10, and then all the taxes will have to be paid by year 10.
So, it’s not like, as everyone understood it previously, you could pay zero tax for years one through nine, and then in year 10 that’s when you have to liquidate everything. Now, what they’re saying is that you have to do a RMD based on your age, which might be 4% coming out a year, but then in year 10, you just have to liquidate everything. So, it’s not really going to change much with regards to the Secure Act. It’s just more of a accounting or record keeping headache, if this is truly the case. Now there’s been some rumblings that the IRS may do another publication or release to clarify that that wasn’t really what their intent was.
So long story short, if the IRS is even confused by some of these rules, what’s the rest of the public going to think as well? So, one of the things we’re recommending is just holding off on taking out your RMDs until later in the year, just so that there’s some clarification, because the IRS doesn’t even really know what they’re doing yet, let alone taxpayers. So, hopefully you found this helpful. This has been Chris Berry with Castle Wealth Group.
Castle Wealth Group has clients across the nation and helps families plan, protect, and preserve what is important, by creating a retirement and legacy blueprint.