You may be aware that if you inherit a retirement account after 2019 you must fully deplete that account within 10 years - exceptions include being the surviving spouse, being less than 10 years younger than the original owner or falling into another special category of beneficiary.

What you may not know is that the IRS issued proposed regulations in 2022 requiring beneficiaries subject to the 10-year rule, to take required minimum distributions (RMDs) in years 1 through 9 with the remainder needing to be distributed in year 10.

This requirement applies to beneficiaries if the original account owner was already taking RMDs, and the penalty for not continuing to take the RMDs is substantial - 50% of the missed distribution.

The IRS has stated that these proposed regulations will not apply until 2023, meaning that beneficiaries who failed to take an RMD in 2021 or 2022 will not be penalized.

Final regulations are still pending; however, beneficiaries should be prepared to incorporate these changes into their tax projections going forward.

In addition to these changes proposed by the IRS, Congress is considering enacting legislation referred to as SECURE Act 2.0. Currently, the House and Senate each have their own version of the bill with some differences that would need to be reconciled into one consolidated piece of legislation - however, there are a number of overlapping proposals common to both bills.

  • Increased age for RMDs - both the House and Senate would raise the age for starting RMDs from 72 to 75 by 2033. The change would be gradual starting with an increase from 72 to 73 in 2023 - from there the bills take slightly different paths before ultimately getting to age 75.
  • Both bills would increase the "catch-up" contribution amount for people in their early 60s still saving in a 401(k) or SIMPLE IRA. The catch-up amount for 401(k)s would go from $6,500/year to $10,000, and from $3,000/year to $5,000/year for SIMPLE IRAs. Both bills would require that these catch-up amounts be made as Roth contributions.
  • The House bill would require employers to automatically enroll employees in the company 401(k) plan at a minimum contribution rate of 3%. This rate would automatically increase each year until the employee is contributing 10% of their compensation. Employees would have the ability to opt out.
  • Other proposed changes include:
    • Eliminating RMDs for Roth 401(k) accounts - Roth IRAs already do not have RMD requirements.
    • Increasing the income cutoff to be eligible for the saver's tax credit.
    • Provisions affecting annuities held in qualified accounts.

Gridlock in Congress has become the norm so it is far from certain that these changes will get enacted into law. That said, we are paying close attention to these proposals as helping Americans save for retirement is one of the few areas with bipartisan support.