Advisors "cannot ignore" the IRS' recently released proposed regulations on how to handle required minimum distributions under the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, "because it's going to trip you up and it could cause everything from embarrassment to litigation," IRA expert Ed Slott of Ed Slott & Co., told ThinkAdvisor in a recent interview.
The key point to know about the regs, according to Slott, is that they affect clients' beneficiaries.
"The problem is the rules force the money out very quickly after death, which means there's a shorter window — all of this money has to come out and it's subject to future higher taxes," Slott warns. "A bigger chunk of the money will be lost to taxes if planning is not done now."
The regs have "little effect on clients during their lives; we're talking about estate planning," Slott explained. "On the back end, it affects the clients with the largest IRAs because more of those assets will be left over to the next generation — they're going to get zapped with taxes in a short window."
Slott previously told ThinkAdvisor that the regs were "the final nail in the coffin for using IRAs for wealth transfer or estate planning."
If advisors "don't know the rules there are certain penalties and all of a sudden the clients' beneficiaries might say: 'How did this happen? Why weren't my parents informed?'"
Most advisors focus on accumulation. "That's important," Slott said. "But many people build large retirement accounts where a lion's share — a big chunk of it — will be left over to beneficiaries and they all have to distribute it within 10 years after death."
As Slott explained, the 10-year rule "is the payout period by which most non-spouse beneficiaries will have to withdraw the balance in their inherited retirement accounts — technically by the end of the 10th year after death."
