It used to be that Americans with tax-favored retirement plans focused mainly on how to get money into them. Now, savers are more and more concerned with when and how much must be withdrawn—including at death or after.

“Virtually all affluent families—as opposed to very wealthy ones—now have significant assets in retirement plans, and it’s essential to focus on them when doing estate planning,” says Natalie Choate, an attorney in Wellesley, Mass., who specializes in retirement plans.

Total assets in traditional and Roth individual retirement accounts, 401(k)s and similar tax-sheltered retirement vehicles grew to $22 trillion in 2020 from $3 trillion in 1995, according to the Investment Company Institute.


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These accounts have swelled from new contributions and market growth as traditional pensions have waned, and many savers now hold a large percentage of their assets (other than homes) in them. Often portions of these accounts are left intact to heirs, who can withdraw the assets over time and benefit from the tax deferral they provide.

Now there’s new guidance from the Internal Revenue Service on required withdrawals for heirs of these accounts. The proposed regulations, issued in late February, would speed up required payouts and add paperwork for many heirs of traditional IRAs but not for heirs of Roth IRAs. They also won’t affect most spouses who inherit retirement accounts.

The new IRS rules fill in details of the Secure Act, a law Congress passed in 2019 that revised rules for retirement plans. One of its changes greatly sped up required withdrawals for many retirement-plan heirs, enraging IRA owners who had made estate plans based on prior law. The faster money has to come out of retirement accounts, the less tax-deferred growth there is.

Here’s what IRA owners doing estate planning need to know about the proposed rules.

New annual withdrawals for some heirs
The Secure Act said that many heirs of traditional and Roth IRAs (and similar accounts) whose owners died after 2019 must empty the accounts within 10 years—not over decades as under prior law.

This rule does not apply if the heir is a spouse, someone less than 10 years younger (often a sibling) or a disabled individual. For minor children (but not grandchildren) who are heirs, the 10-year term doesn’t begin until the heir turns 21. Until the term begins, the heir who is a minor child will also have to take some annual payouts required by the law. These are likely to be small.

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Although the Secure Act’s wording was vague, prominent IRA specialists assumed for several reasons that affected heirs could wait until the 10th year before taking any payouts.

Instead, the new IRS guidance would require heirs subject to the 10-year rule to take annual withdrawals from the accounts during that period if the original owner died on or after his or her “required beginning date” for payouts. Under current law, that’s April 1 after the year in which the IRA owner turns 72.

For example, say that a 50-year-old inherits a traditional IRA from her 77-year-old mother, who died early this year. According to the new rules, this heir must take annual IRA payouts based on her life expectancy as prescribed in IRS Pub. 590-B. Then she must withdraw the remainder when she’s 60. (She could, of course, take larger withdrawals earlier.)

While such payouts could be relatively small for a young heir, they add paperwork, and not taking them could incur stiff penalties.

No annual withdrawals for some other heirs
Under the new rules, heirs who are subject to the 10-year withdrawal requirement don’t have to take annual payouts during that period if the IRA owner died before reaching his or her “required beginning date” as described above.

For example, if a 15-year-old inherits a traditional IRA from a grandfather who died at age 71, then this heir can wait until the end of the 10th year to drain the account.

There’s a twist if a traditional IRA owner dies before his or her April 1 required beginning date. Even if the original owner has already taken a payout at age 72, the heirs subject to the 10-year rule don’t have to take annual payouts—because the original owner never reached his or her required beginning date.

The IRS’s focus on the required beginning date brings some good news for people who inherited Roth IRAs after 2019. Roth IRA owners aren’t required to take annual payouts, so the heirs don’t have to take payouts until the end of the 10-year period.

A change to the age of majority
Under the Secure Act, minor children (not grandchildren) who inherit a traditional or Roth IRA can delay the start of the 10-year payout clock until they reach the “age of majority.”

This age is 18 in many but not all states. To be consistent—and a bit generous—the IRS rules deem the age of majority to be 21. At that point, the 10-year clock starts to run.

Relief from the 50% penalty for the owner’s last payout
Many heirs forget to take a required IRA payout the year the account owner dies, a responsibility that falls on them rather than the executor if the owner didn’t take one before death.

In such cases, the new rules grant a waiver of the stiff 50% penalty if the heir takes the missing payout by the due date of their tax return, including extensions, for the year the payout was missed.

The road ahead
The IRS is accepting comments on the proposed rules through May 25 and will issue final guidance later. In the meantime, retirement-account specialist Ed Slott advises holding off on missed 2021 payouts for years one through nine until the IRS issues a clarification on retroactivity, which he hopes will come by the end of 2022.

He warns, “Right now, people don’t know what to do.”

Write to Laura Saunders at laura.saunders@wsj.com

Corrections & Amplifications
Natalie Choate is an attorney specializing in retirement plans in Wellesley, Mass. An earlier version of this article incorrectly said she was with Nutter, McClennen & Fish. (Corrected on March 11)

LINK: https://www.wsj.com/articles/n...21?mod=hp_lead_pos11

Yet another reason to ROTH.

It sounds and seems painful at the time to pay taxes and see less going in, but in the end the ROTH is generally a much better deal.

quote:

Originally posted by Fly-Sig:
Yet another reason to ROTH.

It sounds and seems painful at the time to pay taxes and see less going in, but in the end the ROTH is generally a much better deal.

Backdoor ROTH too, but I heard that's going away.

quote:

Originally posted by Fly-Sig:
Yet another reason to ROTH.

It sounds and seems painful at the time to pay taxes and see less going in, but in the end the ROTH is generally a much better deal.

Perhaps it is and perhaps it isn't. For me, going with a 401K was a much better deal short run or long run. I was paying close to 50% taxes, so paying no taxes at all on the money was a great deal.

Now I'm retired, I pay a much lower rate on taxes and so I've made out like a bandit.

quote:

Originally posted by Flash-LB:

quote:

Originally posted by Fly-Sig:
Yet another reason to ROTH.

It sounds and seems painful at the time to pay taxes and see less going in, but in the end the ROTH is generally a much better deal.

Perhaps it is and perhaps it isn't. For me, going with a 401K was a much better deal short run or long run. I was paying close to 50% taxes, so paying no taxes at all on the money was a great deal.

Now I'm retired, I pay a much lower rate on taxes and so I've made out like a bandit.

It certainly depends on one's specific situation.

For us, if we have to withdraw from a 401k to pay our expenses, which haven't gone down since retirement last year, our tax bracket will not change by much.

To be considered, too, is we retired before age 65, so we are self-paying for health care. Buying on the Obama exchange there is an income test, so the more we take out of a 401k the more we have to pay for health insurance. 401k withdrawals also count against social security for taxation, plus when we get to medicare age the higher "income" due to 401k withdrawals means getting hosed on our premiums.

Basically everything gets income-tested in retirement, so the less taxable income the better. The 50% income tax rate on the earnings in past years can't be simply compared to your present-day income tax rate. You may pay a lower tax rate now but you pay other costs on top of it.

A high earner who has an expensive lifestyle will have to take a lot out of savings in retirement, so if it is coming out of a 401k they will still be in a high tax bracket. If they're pulling out $100k or more, their tax situation is not pretty in retirement.

For lower earners the tax situation heavily favors ROTH, especially if they are young and have decades before retirement. Employer contributions need to be maxed out, which probably means a traditional 401k for at least that portion.

quote:

Originally posted by Fly-Sig:
Basically everything gets income-tested in retirement, so the less taxable income the better. The 50% income tax rate on the earnings in past years can't be simply compared to your present-day income tax rate. You may pay a lower tax rate now but you pay other costs on top of it.

So exactly what other costs am I paying on top of my present day income tax rate?

Remember the tax code can and will be changed in the future. The Roth IRA could go away. It is a handy target for those who want the so called "rich" to pay more. Nothing is set in stone with the IRS. I remember what the IRS did when parents were using trusts to pay their child's college expenses.

Anyone know what the contribution limit is for a Roth IRA in 2022. Restrictions?

quote:

Originally posted by Flash-LB:

quote:

Originally posted by Fly-Sig:
Basically everything gets income-tested in retirement, so the less taxable income the better. The 50% income tax rate on the earnings in past years can't be simply compared to your present-day income tax rate. You may pay a lower tax rate now but you pay other costs on top of it.

So exactly what other costs am I paying on top of my present day income tax rate?

When I was working, cash flow was more important to me so saving taxes through deferred tax retirement savings was the correct strategy. But as one nears retirement or in retirement, then tax planning becomes a bigger deal.

The first costs that one could be paying is if one has a healthy tax-deferred savings and retirement income, taking Social Security before 70, can subject you a higher tax rate. If your adjusted growth income is less than $31,999 or less, then your social security is tax free. But if you make just $1 more, then 50% of your social security becomes taxable. So earning $1 more jumps you from 12% to something like 45% marginal tax rate because 50% of your social security gets taxed. If you earn $44,000 or more then 85% of your social security benefits becomes taxable. In contrast, if you delay taking Social Security until 70, your benefits increase by 8% each year you delay past Full Retirement Age. You obviously would have to rely on your other retirement income or savings but what's more is you can do roth conversions to get ahead of the Required Minimum Distributions that start at age 72.

RMDs can force you to take more than what you need for living expenses and, worse, they can force you into a higher tax bracket. Getting pushed into higher tax brackets costs you more in taxes. It can also cost you in higher Medicare B Premiums and Drug plan premium. Earning $1 more than $182,000 costs you an additional $68 for Part B and $12.40 for Part D for each person each month.

If your RMD pushes you $1 more than $250,000, then it will cost an additional 3.8% tax on your net investment income or on how much over $250,000.

Doing Roth conversions can reduce your future RMDs and taxes on those RMDs by paying taxes now to avoid paying higher taxes later. And after five years, withdrawing from your Roth won't be taxed.

For example, if all you need for the year is $100,000 then you're in the 22% bracket. The top of the 22% bracket is $172,750. You can take $70,000 from your IRA, set aside $15,400 to pay the taxes on the $70,000 and convert the remaining $54,600. That's called efficient tax planning as drawing the $70,000 in the future may very well put you into a much higher tax bracket.

Additionally, doing the roth conversions now before 2026 means you'll be paying less in taxes. Paying the $15,400 on the $70,000 is only 22% whereas if you did the same numbers in 2026, the tax rates revert back to pre-Trump and the 22% tax bracket will return to being 25%. So converting now or even just withdrawing now will save you 3% in taxes. Not doing so will cost you an additional 3% in taxes starting in 2026.