The new final IRS retirement account inheritance regulations may include an escape hatch from the regular required minimum distribution rules.
Federal law usually requires a client with traditional retirement account assets to begin taking RMDs at age 73. The goal is to force the client to pay some of the income taxes deferred when the client contributed earnings to the account.
But federal laws and regulations once set different rules for holders of single-premium immediate annuity contracts held inside individual retirement annuities, and the new final RMD regulations revive the traditional SPIA framework, according to Gary Mettler, a Boca Raton, Florida-based SPIA specialist.
"Consumers will be so much better off," Mettler said in an email.
He created an 80-year-old model client with a $4,590 RMD and $100,000 for an IRA SPIA based on his interpretation. He found that the model client could increase the amount of RMD passed on to a grandchild by about 70% for the rest of the client's life, to about $1,700 per year.
What it means: If Mettler is right, the new RMD regulations will give some clients who have plenty of income a way to reduce RMDs and increase the amount left to beneficiaries.
RMD basics: Clients who contribute to Roth IRAs and Roth 401(k) plan accounts start by paying their federal income taxes, then put some of what's left over into the accounts. The government has promised to let the Roth account users take cash out of the accounts without imposing federal income taxes on the distributions.
When clients contribute to traditional IRAs and traditional 401(k) plan accounts, they put off paying federal income taxes on the earnings going into the accounts.
The IRS and its parent, the U.S. Treasury Department, see the IRA income tax deferral as a "tax expenditure," costing the government $25 billion per year in desperately needed revenue.
Federal law tries to pull in the deferred income taxes by making traditional retirement account holders take RMDs.
SPIAs: Federal tax rules also encourage people to use single-premium immediate annuity contracts in retirement annuities, in the hope that IRA SPIAs will keep retirees from falling into poverty.
A SPIA is an arrangement sold by a life insurance company that turns one large cash payment, or lump sum, into a stream of income payments.
A retiree can buy a SPIA that provides a guaranteed stream of retirement income for life or a "period-certain" SPIA that provides retirement income for a set number of years.
Advisors have been promoting the use of certain types of immediate annuities to ease the sting of RMD rules since at least 2001.
The IRS adopted regulations governing how taxpayers can pass IRA SPIAs on to beneficiaries in 2006.
Recent RMD developments: Before 2020, many wealth advisors said a wealthy client could use a "stretch IRA" strategy to defer and minimize RMD-related income taxes.
An older client would put assets in a traditional IRA and name grandchildren or great-grandchildren as the beneficiaries.
When the original owner died, the assets stayed in the IRA.
The beneficiaries then used age-based RMD formulas that minimized annual RMDs and RMD-related income tax bills.
A provision in the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 banned the standard stretch IRA strategy, which usually relied on ordinary IRAs, rather than individual retirement annuities, for most beneficiaries.
The provision, which took effect in 2020, requires beneficiaries who inherit traditional IRAs to empty out the assets, and put the distributions in their taxable income, within 10 years.
SPIAs and Secure Act: Mettler argued that the Secure Act's 10-year IRA asset distribution limit had no effect on IRA SPIA inheritance.
He argued that wealth advisors could still use IRA SPIA contracts to create a stretch IRA, as long as the stretch IRA is based on individual retirement annuities.
The relevant rules for passing IRA SPIAs on to survivors and beneficiaries are in IRS regulations section 1.401(a)(9)–6, which went missing in the IRS' first Secure Act regulations, then showed up again in the draft IRS RMD regulations posted in 2022.
