In a preview of her Personal Financial Planning column in the summer 2020 Pennsylvania CPA Journal, Laurie A. Siebert, CPA, discusses changes to required minimum distribution rules as a result of two important pieces of legislation: the SECURE Act and the coronavirus response CARES Act. She goes in-depth on how the changes will affect advice to clients and the need for a coordinated effort by a client’s team of advisers.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

It's amazing how a little legislation can change the rules of personal financial planning. In this case, we are talking about required minimum distributions. While you may be familiar with one set of rules, know that the guidelines for required minimum distributions changed first, due to the SECURE Act, and then due to the coronavirus-inspired CARES Act. In her personal financial planning column for the upcoming summer 2020 Pennsylvania CPA Journal, Laurie A. Siebert, senior vice president of Valley National Financial Advisors in Bethlehem and host of Your Financial Choices on WDIY 88.1 FM, discusses changes that have been made to the rules for required minimum distributions. Today, she offers a bit of a sneak peek.

Before we get into changes to required minimum distribution rules due to the SECURE and CARES acts, can you catch us up a little bit on what required minimum distributions are, and what the rules were prior to these acts?

[Siebert] Required minimum distributions come out of retirement accounts that, during our working years, the IRS allows us to put away money tax-deferred. So, we're not paying income tax money on those investments we're making while we're retired, so that's an incentive to save for retirement. But, at some point, the IRS wants those taxes, so they had implemented a strategy or feature of taking required minimum distributions. Telling people, "Now you do have to finally take that money out and pay income tax on it."

So, a required minimum distribution is the IRS telling us that, at certain ages, you have to take money out of your retirement account and pay income tax on it. The rules traditionally have been, at age 70.5, folks would have to take out a distribution based on their life expectancy, and they would have to take that out in the year they turn age 70.5. But no later than April 1st of the year following the year they turn 70.5.

There's life expectancy tables for those people who fit into that required minimum distribution and that's the uniform lifetime table. Then there's also required minimum distributions for beneficiaries, typically non-spouse beneficiaries. There has always been life expectancy tables for them to follow, so that's a single life table that we've traditionally followed. For those people who are married and have a spouse who's more than 10 years younger, there's even another life expectancy table for them. So, the required minimum distribution has certain rules, and it had been age 70.5 for retired age people, or once you inherit an IRA, you have a required minimum distribution based on your life expectancy, which starts the year after the year of death of the person you're inheriting from.

It feels like a million years ago at this point, but how did the SECURE Act change those rules?

[Siebert] The SECURE Act, which was put in place in December of 2019, changed the minimum distribution age from 70.5 to age 72, so they lengthened that a little bit. They gave us a little bit more time. Same rule applies as far as in the year you turn 72 or April 1st of the year following, so that was a change. Another big change that they had made was for people who continue to work, it used to be that you could no longer contribute to a retirement account, an IRA, after age 70.5. But they also changed that, that if you continue to work into your 80s, you can still contribute to a retirement account. One of the biggest changes, though, with the SECURE Act was the change in the required minimum distribution for beneficiaries though.

With beneficiaries, there's something called a designated beneficiary, there's something called a non-designated beneficiary, and there's something called an eligible designated beneficiary. So it can be very complicated, and we're not going to be able to cover all of that in this podcast. The main thing we want to point out today is awareness; awareness about rules and how they apply. And that you have to make sure that you understand what they are, and that there's this ever-changing environment with required minimum distributions. Basically if you are a designated beneficiary, they have changed your required minimum distribution to not be over your life expectancy. They've accelerated that it has to be taken out within 10 years following the calendar year of the death of the person you've inherited it from.

So they've accelerated the required minimum distribution for designated beneficiaries. Real quick: just a reminder of non-designated beneficiaries. That's where there wasn't a beneficiary, or we couldn't identify a beneficiary, or it wasn't an individual. That is an accelerated distribution of within five years, and that's always been, and that has not changed. Then the little caveat for outside the 10 year under the new rule is for something called eligible designated beneficiary. That's a little more complicated and you'd have to make sure you understand what kind of beneficiary you have.

You talked about rules changing there. Coronavirus comes along and it's changing just about everything, but the CARES Act, it caused these rules to adjust even more. What were the substantive changes to required minimum distributions due to the CARES Act?

[Siebert] The CARES Act came out and tried to help folks who may have been in a situation where the 12/31 2019 balances in retirement accounts might've been quite high because the economy was doing well, the market was doing well, we had quite high balances, and requirement when distributions are based on those balances of December 31st, 2019. So, what happens in 2020, you go to take your required minimum distribution, or you think you have to, and the markets have dropped a bit. We've seen quite a bit of volatility, a lot of choppiness, and we might even see more through the end of 2020. This was an act that said, among many other things, that we could waive our required minimum distribution for 2020, and that includes anyone who is required to take one. It could be those people who are 70.5 taking their normal one, 72, and beneficiaries of IRAs, all required minimum distributions had been waived for 2020, if you hadn't already taken it.

We're in a little pickle for people who might have already taken it, and there's some other rules around that, that have come out. Even subsequently April 9th, there were even more updates to the required minimum distribution provisions for people who had taken it out before these other changes. What if they said, "Hey, I took my required minimum distribution because I thought Iwas supposed to, and now you're saying we don't have to. And, gosh, if I had known about that, I wouldn't have taken it because I don't need it." Or, "I was worried about what happened in the market, and I'd like to get that money working again."

So they made some provisions for people who've taken it out, that they could put it back. We have to be very careful about that, too, because there's timing, there's certain dates. Where people are left out is anyone who took a required minimum distribution from an inherited IRA already, you can't put it back. But for people who were regular RMD kind of age, there are some provisions where you can, but not everybody will be able to do that, it all depends on when you took it and the circumstances of when you took it.

Real quick: if you took your required minimum distribution prior to January 31st, you can't put it back, you've already passed the period where you could. But there are some provisions for certain people, so that should be investigated.

How do you think that some of these changes are affecting the way personal financial planners advise their clients, and what are some of the options for that advice that is being given?

[Siebert] It's almost like a whirlwind. It could almost make your head spin, not because of the general rules that we have, but in the changing rules that we're having. It's almost…you have to keep abreast of this almost every couple of days because we're getting new guidance fairly frequently. And sometimes you'll read something in one publication or on one website, and it may not have all the information. My caution to planners is make sure that you understand it inside and out because you want a complete picture of the options available. As far as financial planning and talking to our clients, so many things are impacted.

You're making decisions about should they take their required minimum distribution? What does that mean from an investment standpoint? What does that mean from a tax standpoint? What does that mean from a cashflow standpoint? What does it mean from an estate planning standpoint? When we talk about naming beneficiaries with calculating required minimum distributions, am I going to name a trusted beneficiary of my IRA, or am I going to name my child a beneficiary, or am I going to name my grandchild? So financial planning in the past, when we could do it over someone's life expectancy, we might've considered naming a grandchild a beneficiary if our children didn't need the money, depending on the planning and the circumstances.

Now, if everything has to be accelerated within 10 years, we have to be very careful in our recommendations when we're doing estate planning and cashflow planning and tax planning for our clients. It's kind of coming at us from all different directions, but it is what makes it exciting and, for me, fun and interesting. That's why there is such a need for good CPAs and financial planners to help guide people through all of these decisions and make sure that they understand the impact of one of those decisions, how it affects another area.

It's always dangerous when you talk about general philosophies because people approach things from different ways. But what should that general philosophy of a client be in an economic downturn like this? What do they have to do to protect that nest egg they've built up during this time of uncertainty?

[Siebert] It’s interesting because there still are a number of applications you have to be aware of when we're talking about protecting the nest egg, because we want to look at someone's cashflow, we want to look at their tax consequences, we want to look at their risk tolerance in their investment allocation. What we want to try to tell folks is you want to go in to any decision you're making as informed as you can be. If we're looking at markets and people are saying, "Oh gosh, I need to get out." Well, we can't time the market, people should understand that. We also know that diversification makes a huge difference in our performance over time. And that in timing the market, especially in these volatile times, if you get out and you think you're going to wait until things get better, well, you've sold low and you've bought high, and you can't always time the recovery in these types of volatile markets. Being out two days, you could miss the recovery, which we saw a deep V recently in March.

You've got to watch out for that type of thing. I think one of the most important things I try to make sure with clients is do you have your emergency reserve? And if you're in your retirement years, do you have five years’ worth of spending set aside in a little bit more conservative allocation so that you can tap it and avoid having to get out of the market when the market's down? Thinking about that, and then also in those decisions back to the required minimum distribution, do you take it, do you not take it? For those folks who haven't taken their required minimum distribution and know they can waive it, you still have through to the end of the year to decide if you actually want to take it.

And if you're worried about markets being choppy, there might be an opportunity if you didn't get out before and you really needed that money, you could maybe wait it out a little bit, see if there's more of a recovery that you're comfortable with, and potentially take a required minimum distribution later. It needs constant attention.

Tons of interesting stuff in the summer 2020 Personal Financial Planning column, by the way, but this one jumped out at me: When you say that changes coming at this speed might require a coordinated effort from a client's trusted advisors, who should be in that group for clients, and why is it important that these advisors make sure that they're on the same page?

[Siebert] It's interesting: I'm part of an estate planning group in the Lehigh Valley, and we always talk about the coordinated effort of all of the client's trusted advisors, which includes financial planners, attorneys, accountants, insurance providers. And I don't mean to leave anyone out, but generally there is a broad swath, and that's because if you have a financial advisor, an investment advisor, who advises you to change a beneficiary on an account for whether it's an IRA, life insurance policy, annuity, whatever it might be, and you haven't coordinated that with the attorney, then there may be some estate planning that you disrupt that the attorney might have put in place. If you're the accountant, the CPA, preparing the tax return, and you notice something on someone's tax return and you say, "Hey, why don't you take money out of your IRA right now?" and the individual client goes and takes money out of the IRA, that could have disrupted the investment advisor’s asset allocation.

So, you want to make sure that certain people might act as the quarterback for a client or the client is serving as their own quarterback, but it would be important for professionals to make sure when they're working with any individual, that you counsel them to make sure that they have talked to all of their advisors to make sure you've thought through the decisions as a group, that if you're making a decision in one area, you're covering the other. Real quick example: some people named IRAs with trust as beneficiaries. Well, now with the required minimum distribution rules changing for deaths post 12/31/19, as of 1/1/2020, this 10-year accelerated distribution on inherited IRAs, you might not want a trust getting that money because, depending on what the terms of the trust are, if that income is trapped inside the trust at trust income tax rates, you could really hurt the future value of that trust if you're paying so much money out at the top tax rates.

That's why you want to coordinate with attorneys, investment advisors, financial planners, insurance people, your CPA, to make sure it's all working together. It's not as complicated as I'm making it sound because these professionals are used to working together and hopefully they make a coordinated effort so that the client gets the best decision they can make with the information they have available at the time. Because, again, sometimes these changes happen so quickly, even the recent waiver of the required minimum distribution for 2020. As I mentioned briefly earlier, there have been some changes that allow people to put those back beyond the 60-day rule, but you have to understand the rules and how they apply to you.