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IRS Acts to Delay Required Minimum Distribution and Other Retirement Compliance Rules

IRS Acts to Delay Required Minimum Distribution and Other Retirement Compliance Rules

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    More Retirement Plan Deadlines Extended

    For those who have traditional IRAs or employer retirement plans like 401(k)s, the required minimum distribution (RMD) rules can strikingly increase their tax burden once they reach their 70s. The underlying policy is this: Taxpayers reduce their taxable income by contributing to retirement plans during higher income years by deferring taxes with contributions and letting their accounts grow tax-free. However, a taxpayer cannot avoid taxes on these accounts forever.

    The tax law requires that, at a certain age (previously age 70 ½), a percentage of the account must be distributed as taxable income to the account holder each year. Usually, the taxpayer is retired and in a lower bracket at that time. While there are planning possibilities, charitable contributions, and inheritance options that may reduce retirement income, taxable RMDs are taken by most account holders. Thus, it is important to know the exact rules because failure to withdraw the required amount can result in an added 25% excise tax on distribution shortfalls.

    Note that Roth plans do not have required minimum distributions.

    Required Minimum Distribution Basics

    Here’s how RMDs work:

    • A minimum amount must be withdrawn yearly from most tax-deferred retirement accounts based on the account balance and life expectancy of the taxpayer.
    • Pre-tax distributed amounts are taxed as ordinary income.
    • Failure to take the correct distribution amount can result in an additional excise tax of up to 25%. This penalty may be reduced to 10% if corrected within two years.

    Rules Keep Changing

    The RMD rules have been changed by Congress and the IRS four times since 2019 by the SECURE Act of 2019, the CARES Act of 2020, the SECURE 2.0 Act of 2022, and updated IRS final and proposed regulations in 2024. The 2020 law waived RMDs for year 2020. The other changes raised the RMD starting age from 70½ to 72, then to 73 (and eventually 75 for those turning 74 after 2032). The Acts and regulations also overhauled the rules for inherited IRAs to require a maximum 10-year payout for non-spouse beneficiaries. 

    Latest Timeline

    Despite the changes noted above, taxpayers, plan sponsors, and the IRS all believe more time is needed to put the Secure Act 2.0 framework in place. Several important rules were set to take effect in the 2026 distribution calendar year. Now, the IRS has announced that three areas of change will apply no earlier than 6 months after the anticipated final regulations are published in the Federal Register. This change has the effect of extending the previous 2026 date. These include:

    • Rules for identifying a designated beneficiary as of the employee’s death, handling trust beneficiaries (“look-through” rules), and determining eligible designated beneficiaries such as spouses or disabled individuals.
    • For defined contribution plans, how to calculate annual RMDs and determine the applicable distribution period; rules for beneficiary distributions; and the mandate that excess distributions in one year cannot reduce future RMDs.
    • For defined benefit plans and annuity contracts, how annuity payments must be structured to satisfy tax rules, including the first payment timing, the minimum distribution incidental benefit rule, and permissible payout periods.

    Until these regulations take effect, the Announcement advises that taxpayers must apply a “reasonable, good faith interpretation” of the statutory provisions.

    Plan Administrators Get Relief, Too

    Plan administrators are getting relief from the IRS as well. In Notice 2026-09, the IRS extends the deadline for required amendments to IRAs, simplified employee pensions (SEPs), and SIMPLE IRA plans to comply with the SECURE 2.0 Act of 2022. The deadline was December 31, 2026 but now has been moved out one year to December 31, 2027. The extension applies to the following documents:

    1. written governing instruments for a traditional or Roth IRA
    2. contracts issued by an insurance company with respect to an IRA that is an individual retirement annuity
    3. an employer’s SEP arrangement
    4. an employer’s SIMPLE IRA plan

    The IRS explains that the delay is necessary because it is still developing model language that may be used by IRA trustees, custodians, and issuers to amend an IRA for compliance.

    Conclusion

    Retirement plans bring significant tax benefits but also can cost taxpayers if the many complex rules are not followed. The IRS’s forbearance on implementation of the new rules is welcome and gives taxpayers the time to plan for the most beneficial treatment of their retirement investments. Use this time wisely by consulting with your financial adviser at Frazier & Deeter.

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