Is There a Remedy for RMD Confusion?

Financial planners dish on the hot mess created by new Secure Act 2.0 rules for required minimum distributions.

By Ed Prince

Oh, those annoying required minimum distribution rule changes!

It’s no secret that the IRS’s new regulations resetting the minimum age for starting RMDs from retirement accounts, and the new 10-year RMD rules for inherited IRAs, are confusing clients and frustrating advisors.

Rethinking65 checked with several advisors who confirmed their clients are befuddled by the arcane language.

The changes, which are part of Secure Act 2.0, include a reset to 73 on the minimum age that individuals must take their first RMD from their retirement account.

Anyone who turned 72 last year had to take their first RMD (for 2022) by April 1, 2023. Their second RMD (for 2023) is due by Dec. 31, 2023.

Those who turn 72 in 2023, must take their first RMD (for 2024) on April 1, 2025.

The new 10-year rule for inherited IRAs is causing the most client confusion.

Under Secure 2.0, the recipient of an inherited IRA is required to distribute the full balance within 10 years, and in most cases must take RMDs, according to the IRS. The determination of whether an RMD is required depends on the age of the decedent.

The amount of the RMD is based on the age of the beneficiary, and the IRS has introduced new tables for that determination.

In apparent admission that confusion over the new rules continues, the IRS announced in July that it was again delaying the requirement for RMDs for non-spousal beneficiaries of IRAs.

Advisors air their gripes

An unscientific sampling of financial planners found that their clients are — no surprise —confused.

And individuals without an advisor will be totally at sea, says Derek Tharp, CFP, who operates Conscious Capital, a Portland, Maine, boutique wealth management firm that specializes in socially conscious investing.

“I’ve seen a lot of confusion in the marketplace around the new rules,” resetting the RMD start age, says Tharp, who is also an associate professor of finance at the University of Southern Maine.

“And then definitely the inherited IRA. I’ve seen even more confusion to the point that I think typical consumers just feel so overwhelmed now, trying to navigate the maze of rules for figuring out how they need to take RMDs, and if they need to take RMDs, and knowing how all that works.”

Like other advisors, Tharp said the IRS’s changes, clarifications, and delays in rule implementation have been confusing for advisors as well as clients.

“And so now they kick the can down the road for a couple of years. … Still waiting for final clarification of exactly what the requirements are going to be. And I do hope that some sort of simpler solution can be found. Because it is going to be a very, very confusing process. I think more confusing than it should be.”

Tharp says he’s explained the IRA rule change to clients, but in the end, some tell him to just take care of it.

“I have tools and other resources that allow me as an advisor to navigate the maze of rules and help somebody understand what they need to do in their particular case,” he says. It’s more of a challenge than explaining, say, how a Roth and a traditional IRA work. “And then it’s, ‘Okay, yeah, that makes sense. I understand that,’” he says.

“Helping somebody understand what RMD rules apply to them is more like, ‘Okay, I’m glad you’re putting me through this, but I still have no idea what’s going on with this maze of rules.’

“People are leaning heavily just on the guidance of the professionals they’re working with, rather than really understanding or comprehending the rules,” Tharp says.

Mixed transition

“The inherited IRAs are such a mess,” agreed Mackenzie Parsons, CFP, principal and financial planner at Cornerstone Financial Planning in Portland, noting that the IRS has extended the waiver for 2023 RMDs for inherited IRAs. “That’s showing that they understand that they’re not being clear about this.”

Another change by the IRS, new age tables used to determine the amount of an RMD, has been a headache for Parsons. “We already have in our system the old tables, and so it’s going through and updating the tables. It’s definitely been quite the debacle.”

But at Moisand Fitzgerald Tamayo, the transition has been going smoothly, reports DJ Hunt, CFP, a senior financial advisor with the firm in Melbourne, Fla.

“We familiarized ourselves with the Secure 2.0 changes as they were announced and followed along with the clarifications that subsequently trickled out as the year went on,” Hunt responded in an email. The firm then shared the new info with affected clients. “Because we proactively reached out, I’m not aware of any incoming questions.”

Additionally, “as we have onboarded new clients throughout the year, we make sure to discuss the new client’s situation with them as it relates to their specific RMDs and inherited accounts,” he writes.

Double trouble with double-inherited IRA

Hunt reports one minor hiccup:

“We had to go back and change a plan for one client because it came to light that their inherited IRA was actually double-inherited — the person our client inherited it from had inherited it from someone else. That was a new wrinkle for us and comes with a different set of rules.”

Hunt’s main gripe is with the new inherited IRA rules.

“If I were king, I would make ALL inherited IRAs (except, of course, for spousal) use the inheritor’s life table for payouts. I think the 10-year rule is in place to force high-income inheritors of large IRAs to pay up quickly. I don’t have the data on hand to back this up, but my feeling is that lower income inheritors tend to have the account depleted well before 10 years anyway.”

Hunt echoes other professionals that it’s “a near certainty” that people without an advisor will run afoul the new rules.

“It’s hard enough for the pros to navigate that mess,” he says.

Demming Financial Services, Inc., in Aurora, Ohio, deals daily with hundreds of RMDs, says David W. Demming, CFP. “We are finishing final RMD checks for our clients with QCDs and corresponding safe harbor tax forecasts for all qualifying clients. This is a normal year end review for us, so no one incurs a penalty or last-minute drama,” Demming responded in an email.

Now more than ever, advisors need to be proactive, says Paul Morrone, a wealth manager with U.S. Wealth Management in North Haven, Conn.

“The current IRA holder’s goals and financial situation is almost tantamount to that of their intended beneficiaries given the restrictive nature of the 10-year rule and complexities surrounding it,” Morrone responded by email. “Roth conversions have become much more important, especially for those who may have ‘excess’ pretax retirement funds.”

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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