Friendship and Finances

When making plans with friends:

  • Ask for ideas from everyone in the group to ensure it fits within your friends’ budgets.
  • Give plenty of heads up if there’s a big-ticket event you’d like your crew to take part in.
  • Have an open conversation about finances to remove the taboo and build understanding.

From buying gifts and eating out, to going to weddings and planning vacations, money plays a part in all relationships. And friendships are no exception.

 

Here are some do’s and don’ts for dealing with mixed-income friendships.

Do ask your friends for input. Even if you’re the unofficial events coordinator for your group, ask everyone for ideas so nobody feels backed into a corner. You can ask questions like, “How much is OK to spend on gifts?” and What do you suggest we do for our get-together.” It will be more inclusive for everyone to suggest activities that align with their budget.

 

Do extend the invite. Always ask, even if you’re pretty sure something is out of your friend’s price range.

 

Don’t make assumptions. You can’t assume anyone’s budget and financial situation.

 

Do give plenty of notice. If you’re planning something give your friends advance notice so they can budget for it. A longer lead time gives them the chance to save up for that fancy birthday dinner or night at the theater if they want to join you. Last-minute plans might not be possible if they’re working on a tight budget.

 

Don’t be upset if they take a pass. Understand that not only do your friends’ finances differ, but so do their priorities. Even if you’ve given plenty of notice, a weekend wine tasting trip with girlfriends might not be as important as visiting family for the holidays. While you might be well-positioned to do both, you shouldn’t assume that your friend is.

 

Do offer to pay if it’s in your budget and having their company is worth it to you. That doesn’t have to mean you’ll cover the cost of their flight. But, consider offering to pay for cocktails one night while you’re away or covering the cost of a rental car in your destination city. Be open about your feelings and understand if they politely decline. Which leads to the next tip…

 

Don’t be afraid to have an honest conversation. I’m not suggesting you swap bank statements. Just don’t be afraid to say if something is out of your budget or if you’re prioritizing a different expense. With communication and understanding you can make money less of a taboo topic with friends and have a better chance of making memories that fit into everyone’s budget.

 

Keeping these do’s and don’ts in mind when it comes to finances will open communication, strengthen friendships, and provide opportunities to create lasting memories.

Sources: theeverygirl.com; huffpost.com; tampabay.com, morningbrew.com, Raymond James. 10.27.22 29508

5 Steps to Determine How Much Income You’ll Need in Retirement

5 Steps to Estimate Retirement Income Needs

USE YOUR CURRENT INCOME AS A STARTING POINT

It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on who you’re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach is its simplicity. It seems fairly common-sense – Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

The problem? It doesn’t account for your specific situation. For example, if you want to travel extensively in retirement you might easily need 100% (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

PROJECT YOUR RETIREMENT EXPENSES

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

    • Food and clothing
    • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
    • Utilities: Gas, electric, water, telephone, cable TV
    • Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
    • Insurance: Medical, dental, life, disability, long-term care
    • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
    • Taxes: Federal and state income tax, capital gains tax
    • Debts: Personal loans, business loans, credit card payments
    • Education: Children’s or grandchildren’s college expenses
    • Gifts: Charitable and personal
    • Savings and investments: Contributions to IRAs, annuities, and other investment accounts
    • Recreation: Travel, dining out, hobbies, leisure activities
    • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
    • Miscellaneous: Personal grooming, pets, club memberships

Don’t forget that the cost of living will go up over time, and keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they’re as accurate and realistic as possible.

DECIDE WHEN YOU’LL RETIRE

To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

ESTIMATE YOUR LIFE EXPECTANCY

The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

IDENTIFY YOUR SOURCES OF RETIREMENT INCOME

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

NOT A CORNERSTONE CLIENT?

If you have questions about your financial plan please contact us today to schedule a complimentary, no obligation review with one of our advisors. Call 605.357.8553 or email cfsteam@mycfsgroup.com.

M22-12417 Exp 2025.09.27. This information is not intended to be a substitute for specific individualized tax, legal, estate, or investment planning advice as individual situations will vary. Please discuss these matters with the appropriate professional.

Backdoor Roth IRA Baggage

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC. As a member of Ed Slott’s Elite IRA Advisor Group™ Gordon keeps Cornerstone professionals on the cutting-edge of retirement, tax law, and IRA distribution planning through continuous training with Ed Slott and his team of IRA Experts.

Membership includes immediate notification of changes to the tax code and updates on retirement planning, and 24/7 access to Ed Slott and Company, LLC to confer with on complex cases. Just one of the tools in the Cornerstone arsenal that helps you avoid unnecessary taxes and fees on your retirement dollars! As always, give us a call if you’d like to discuss!

BACKDOOR ROTH IRA BAGGAGE

A Backdoor Roth IRA strategy is when high-income earners – those over the Roth IRA income threshold ($230,000 – $240,000 for those married filing joint in 2024; $146,000 – $161,000 for single filers) – can make non-deductible contributions to a traditional IRA and then convert the traditional IRA to a Roth, thereby circumventing the income limitations. (We can expel the notion that this is a step transaction or that a Backdoor Roth IRA is on the precipice of illegality. In 2018, a tax law specialist with the IRS Tax-Exempt and Government Entities Division stated that Backdoor Roth IRAs will not be challenged by the IRS.)

You may have heard, “If your income is too high for a direct Roth IRA contribution, just do a Backdoor Roth.”

 

Easy-peasy, right? Maybe not. 

 

Backdoor Roth IRA baggage

A Backdoor Roth IRA transaction can carry a lot of “Backdoor baggage,” including:

1. The Pro-Rata Rule – No Cherry Picking. The pro-rata rule dictates that when an IRA contains both nondeductible (after-tax) and deductible (pre-tax) funds, each dollar withdrawn (or converted) from the IRA must contain a percentage of tax-free and taxable funds. This ratio is based on the percentage of after-tax dollars in all of a person’s traditional IRAs, SEP and SIMPLE plans. You can’t target just the after-tax IRA dollars and only convert those. Additionally, once you have after-tax dollars (basis) in your IRA, getting it cleaned out could require some heavy lifting. For example, the entire account could be converted, but that might be a tax hill too steep to climb. Or, the pre-tax dollars could be segregated by rolling them into a 401(k). But this assumes access to a 401(k) that allows a rollover into the plan.

2. Multiple Tax Forms.Every Backdoor Roth transaction creates three or four tax forms. When a non-deductible contribution is made to an IRA, you must declare that there are after-tax dollars in the account. This is done on IRS Form 8606. Failure to file Form 8606 could result in double taxation. When dollars leave a traditional IRA via conversion, a 1099-R is generated the following year. Form 5498 is also created the next year to document the conversion. And when tax time comes around, the same Form 8606 is used to document the pro-rata math and how much of the conversion is taxable.

3. Crossing Tax Years. What if you make a prior-year (2023) non-deductible IRA contribution in January 2024, but then immediately convert? That will require a Form 8606 for the 2023 tax return to claim the basis. The conversion will generate a 1099-R and 5498 (issued in 2025) for the 2024 tax return, and a second Form 8606 must be filed with the 2024 return documenting the pro-rata math. Four forms. (Yes, good tax software can certainly help.)

Be aware that, until the after-tax dollars are cleared out of a traditional IRA, it’s your (the taxpayer’s) responsibility to track the basis. And, if you’re a high earner who continues to make (and convert) non-deductible contributions each year, the annual baggage of a Backdoor Roth IRA can pile up and follow you like an overloaded luggage cart with a wobbly wheel.

By Andy Ives, CFP®
IRA Analyst, Ed Slott, LLC

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2024, Ed Slott and Company, LLC Reprinted from The Slott Report, January 31, 2024 with permission. https://www.irahelp.com/slottreport/how-do-youreport-2023-roth-ira-contributions-your-tax-return-answer-may-surprise-you-0. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, or Andy Ives.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

CSP #Insights Newsletter 415437, Insights Newsletter Issue 2 Feb 2024, Exp. 4.2.25

Why Working With a CERTIFIED FINANCIAL PLANNER™ Professional is Important

WHY WORKING WITH A CERTIFIED FINANCIAL PLANNER™ PROFESSIONAL IS IMPORTANT

What is the difference between a CERTIFIED FINANCIAL PLANNER™ (OR CFP®) professional and a financial advisor?

A CFP® professional is one of many types of financial advisors. A financial advisor must earn the right to call themselves a CFP® professional

Most people think all financial planners are “certified,” but the fact is: anyone who is licensed to sell these products and give advice can use the title “financial planner.” Upon learning this, I found myself feeling disheartened – especially since I am studying to earn the CFP® designation so that I can better serve you.

A CFP® professional holds an expertise in financial and investment planning and earned their marks from the Certified Financial Planner Board of Standards, Inc.

Working alongside my fellow financial advisors, Gordon and Jill, I’ve seen how the CFP® designation sets them apart from other financial advisors in areas such as educational background, proven qualifying experience, and commitment to ethical standards. Being able to serve our clients in that way helped drive me to complete the requirements, coursework, and testing to earn my CFP® designation in 2024.

Are you working with a CERTIFIED FINANCIAL PLANNER™ professional, or looking to work with one? Here’s what you should know:

    • What is the difference between a CFP® professional and a financial advisor?
    • What percentage of financial advisors are CFP® professionals?
    • Is my financial advisor a CFP® professional?
    • How does a financial advisor become a CERTIFIED FINANCIAL PLANNER® professional?
    • What is the CFP Board’s financial planning process?
    • Is a CERTIFIED FINANCIAL PLANNER® a fiduciary?
    • How can I learn more about the CFP® certification?

What is the difference between a CFP® professional and a financial advisor?

A CFP® professional is one of many types of financial advisors. A financial advisor must earn the right to call themselves a CFP® professional.

Here are a few considerations to why one might consider working with a CFP® professional.

Credentials

A financial advisor that earns the rights to use the CFP® marks shows an expertise towards financial planning, a level of professionalism, and distinguishes themselves for their clients. If working with a financial advisor with additional training in retirement planning is important to you, you may want to consider speaking with a CFP® professional.

Education

A CFP® professional is required to show a commitment towards continuing education. There is no requirement for a financial advisor to earn a college degree or receive advanced financial planning education, although all individuals licensed to sell securities or give advice must complete yearly continuing education as required by regulators and their firms. If working with a financial advisor dedicated to ongoing education is important to you, you may want to consider speaking with a CFP® professional.

Experience

While there are many financial advisors with years of experience, a financial advisor must accumulate approximately three years of work experience before using the CFP® marks.

Ethics

All financial advisors must adhere to a higher ethical standard and serve clients as a fiduciary throughout the advisory engagement. CFP Board’s Code of Ethics and Standards of Conduct reflects the commitment that all CFP® professionals make to high standards of competency and ethics. A copy can e found here: https://www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct.

How can I learn more about the CFP® certification?

“CERTIFIED FINANCIAL PLANNER™ certification is the standard of excellence in financial planning. CFP® professionals meet rigorous education, training, and ethical standards, and are committed to serving their clients’ best interests today to prepare them for a more secure tomorrow.”

The Certified Financial Planner Board of Standards, Inc.

What percentage of financial advisors are CFP® professionals?

About 29% of financial advisors in the United States are CFP® professionals.

    • There are approximately 612,457 registered representatives eligible to sell securities in the United States, according to FINRA. ¹
    • There are 95,137 CFP® professionals in the United States according to the Certified Financial Planner Board of Standards, Inc. ²

Is my financial advisor a CFP® professional?

You can determine if your financial advisor is a CFP® professional by going to the CFP Board’s verification page.

The wealth advisors at Cornerstone Financial have committed to hold the CFP® designation or be working to complete the rigorous certification process. The CFP® designation is considered the standard of excellence in financial planning. Gordon earned his CFP® in 2000, Jill earned her certification 2016, and Andrew earned the designation in 2024.

How does a financial advisor become a CERTIFIED FINANCIAL PLANNER™ professional?

According to the CFP Board, it typically takes 18-24 months to become a CFP® professional. To become a CFP® professional, a financial advisor must meet requirements for education, exam, experience, and ethics.

Education: To satisfy the education requirement, a candidate must first earn a bachelor’s degree from an accredited college or university.

Then, a candidate must complete a CFP board education program consisting of classes focused on financial planning process, insurance, investment planning, income tax planning, retirement planning and employee benefits, estate planning, and financial plan development. Certain individuals may qualify for an accelerated education path.

Exam: To satisfy the exam requirement, a candidate must pass the CFP® exam consisting of a six-hour multiple choice exam.

Experience: A candidate must accumulate 6,000 hours of professional experience related to financial planning.

Ethics: A candidate must adhere to the high ethical and professional standards for the practice of financial planning found in the CFP Board’s Code of Ethics and Standards of Conduct. A Copy can be found here: https://www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct.

What is the CFP Board’s financial planning process?

A CERTIFIED FINANCIAL PLANNER™ professional must follow the CFP Board’s seven-step financial planning process.

  1. Understanding the Client’s Personal and Financial Circumstances
  2. Identifying and Selecting Goals
  3. Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
  4. Developing the Financial Planning Recommendation(s)
  5. Presenting the Financial Planning Recommendation(s)
  6. Implementing the Financial Planning Recommendation(s)
  7. Monitoring Progress and Updating

 ¹ FINRA Statistics as of 12/31/2021
² CFP Board Professional Demographics as of 01/01/2023
Certified Financial Planner Board of Standards, Inc. Code of Ethics

 

Helping you build a financial plan to achieve what’s truly possible is what we do. Empowering you to pursue greater dreams is who we are. I’d love to visit with you about your dreams. Feel free to contact our office at 605-357-8553 or email me at cfsteam@mycfsgroup.com.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Andrew Ulvestad and not necessarily those of Raymond James.

CSP #388978 Exp. 1.17.25

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Time is Running Out for 2023 QCDs

Time is Running Out for 2023 QCDs

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

If done correctly, a QCD can satisfy your required minimum distribution (RMD) for the year and help reduce your income taxes

If you are charitably inclined and have an IRA, you might want to consider doing a Qualified Charitable Distribution (QCD) for 2023. If done correctly, a QCD can satisfy your required minimum distribution (RMD) for the year and help reduce your income taxes. The deadline for a 2023 QCD is fast approaching – December 31, 2023. Many custodians have even earlier cutoffs. Don’t miss out on this valuable tax break. Here is what you need to know.

  •   You must be age 70 ½.

IRA owners who are age 70½ and over are eligible to do a QCD. This is more complicated than it might sound. A QCD is only allowed if the distribution is made on or after the date you actually attain age 70 ½. It is not sufficient that you will turn 70 ½ later in the year.  

  •   You can be a beneficiary and do a QCD.

QCDs are not limited to IRA owners. An IRA beneficiary may also do a QCD. All the same rules apply, including the requirement that the beneficiary must be age 70 ½ or older at the time the QCD is done. 

  •   QCDs are only allowed from IRAs.

You may take QCDs from your taxable IRAs funds. QCDs are also permitted from SEP and SIMPLE IRAs that are not ongoing. An ongoing SEP and SIMPLE plan is defined as one where an employer contribution is made for the plan year ending with or within the calendar year in which the charitable contribution would be made. QCDs are not available from an employer plan. 

  •   There is a $100,000 annual limit for 2023.

QCDs are capped at $100,000 per person, for 2023. For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own account. 

  •  You can satisfy your RMD with a QCD.

A QCD can satisfy your required minimum distribution (RMD) for the year. A QCD can be more than the RMD amount for the year as long as it does not exceed the $100,000 annual limit. 

  •   Only taxable IRA funds are eligible.

QCDs apply only to taxable amounts. No basis (nondeductible IRA contributions or after-tax rollover funds) can be transferred to charity as a QCD. QCDs are an exception to the pro-rata rule which usually applies to IRA distributions. 

  •   You must do a direct transfer.

If you want to do a QCD, you must make a direct IRA transfer from the IRA to the charity. If a check that is payable to a charity is sent to you for delivery to the charity, it will qualify as a direct payment. 

  •   New rules allow QCDs to split interest entities.

A QCD can be made to a charity which is eligible to receive tax-deductible charitable contributions under IRS rules. The QCD rules are not available for gifts made to grant-making foundations or donor-advised funds. The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. A taxpayer does not have to itemize deductions, but the gift to the charity still has to meet all of the deductibility rules.

New rules for 2023 allow a QCD to a split interest entity such as a charitable gift annuity. This can only be done in one year of your lifetime and is limited to $50,000 for 2023. 

  •   The charitable substantiation requirements apply.

You should have documentation to substantiate the donation (something in writing from the charity showing the date and amount of the contribution and a statement that you received nothing of value in return). 

  •   You must report the QCD on your tax return.

The IRA custodian will not be separately reporting the QCD. There is no code or box on the 1099-R to identify the QCD. It will be up to you to let the IRS know about the contribution by including certain information on your tax return.

5 Areas of Comprehensive Financial Planning

Are you aware of – and taking advantage of – every opportunity to reduce your tax burden?

By coordinating all five areas of wealth management, a Cornerstone Plan gives you the confidence to achieve the dreams calling to you. We would be honored to help you with:

  • Retirement Planning, including 401k analysis
  • Tax Strategies, including tax planning for business owners
  • Investment & Portfolio Management
  • Estate planning, including business succession & exit strategies
  • Insurance Planning

Get #CornerstoneConfident – book a financial planning strategy appointment today by calling 605-357-8553. 

Membership in Ed Slott’s Elite IRA Advisor Group™  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, December 13, 2023 with permission. Author: By Sarah Brenner, JD, Director of Retirement Education, Ed Slott & Company. https://www.irahelp.com/slottreport/time-running-out-2023-qcds. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, The Elite Advisor Group™, or Sarah Brenner, JD.

CSP #361807 Exp 12.15.24

Confusion over RMD Distribution

Confusion Over Required Minimum Distributions (RMDs)

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

To the surprise of many, the IRS released proposed SECURE Act regulations last year requiring beneficiaries (on some occasions) to take required minimum distributions (RMDs) during the 10-year payout period.

In the past, most non-spouse beneficiaries could “stretch” RMDs from inherited accounts over their own single life expectancy. RMD rules for 2023 are more confusing, thanks to the 2019 SECURE Act passed by Congress, and IRS proposed regulations of Feb. 23, 2022.

The 2019 SECURE Act included the 10-year payout rule, requiring most retirement account beneficiaries for deaths in 2020 or later to empty the retirement account by the end of the 10th year following the year the account owner died.

The IRS issued proposed regulations on February 23, 2022, taking the position that when death occurs on or after the required beginning date (RBD), a non-eligible designated beneficiary must take annual RMDs and empty the account under the 10-year rule.

The rule requiring annual RMDs when an account owner dies on or after her RBD is sometimes called the “at least as rapidly” (ALAR) rule. While it does not require the beneficiary takes the same amount that the IRA owner was taking, it does require that the process of taking RMDs continue. This interpretation surprised many who thought the 10-year rule would apply like the pre-SECURE Act 5-year rule, which did not require annual RMDs.

 

How has the IRS responded to RMD confusion?

The IRS has waived some RMD penalties when certain beneficiaries fail to take an RMD due to a reasonable error. Waivers are only applicable to RMDs within the 10- year period and you are usually required to file Form 5329 to request a waiver. For 2023, SECURE 2.0 reduces the penalty from 50% to 25% of the amount not taken. The penalty is further reduced to 10% if the missed RMD is taken and the penalty is paid during a 2-year correction window.

Last year, the IRS issued Notice 2022-53, which waived penalties for missed 2021 and 2022 RMDs within the 10-year period, for deaths that occurred in 2020 or 2021. Recently, the Service released Notice 2023- 54, extending the penalty waiver to cover missed 2023 RMDs when the death occurred in 2020 or 2021. It also excuses the penalty for missed 2023 RMDs when the death took place in 2022.

Although the Notice does not state this directly, it appears that since the penalty is waived, the 2023 RMD, like 2021 and 2022 RMDs within the 10-year period, doesn’t have to be taken. It also appears that these missed RMDs within the 10-year period will not have to be made up. (Note that if these RMDs were already withdrawn, they cannot be returned or rolled over.)

Example:

Lola died in 2020 at age 75 with a traditional IRA. Her adult daughter, Anabella, is a non-eligible designated beneficiary subject to the 10-year rule under the SECURE Act.

WHY?  The proposed regulations say that because Lola died after her RBD, Anabella must take RMDs based on her single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 says that if Anabella failed to do so for 2021 and 2022, there is no penalty on the missed RMDs. Notice 2023-54 extends this relief to the 2023 RMD. If Anabella had already taken a distribution, believing she needed to take an RMD for 2023, she may not roll over those funds. Notice 2023-54 also provides relief to successor beneficiaries subject to RMDs within the 10-year rule.

Example:

Dave died in 2019 at age 90 with a traditional IRA. As designated beneficiary his adult son, Russell, can take annual RMDs from the IRA because Dave died before the SECURE Act became effective.

Russell dies in 2020. His son Theodore, the successor beneficiary, is subject to the SECURE Act and the 10-year rule, and must also take RMDs based on Russell’s single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 said that if Theodore failed to take his 2021 or 2022 RMD, there would be no penalty. Notice 2023-54 extends this relief to 2023 RMDs. Beneficiaries who inherited a Roth IRA do not need this relief. Under the IRS proposed regulations, anyone who inherits a Roth IRA is deemed to have inherited from a person who died before his RBD. This is because Roth IRA owners are not subject to lifetime RMDs. Most Roth IRA beneficiaries are still subject to the 10-year rule, but RMDs are not required for years 1-9.

 

Does Notice 2023-54 waive all RMDs for 2023?

No. The Notice doesn’t affect lifetime RMDs, inherited IRAs by eligible designated beneficiaries (EDBs), or RMDs by beneficiaries who inherited before 2020.

Example: Monica has an IRA. She is 80 years old and must take a lifetime RMD for 2023. If Monica fails to do so, Notice 2023-54 doesn’t provide any relief from the penalty.

Example: Arthur inherited an IRA from his mother in 2018. Arthur has been taking RMDs each year based on his single life expectancy. Because he inherited prior to the SECURE Act, Arthur can continue the stretch. However, if he fails to take an RMD in 2023, Notice 2023- 54 does not relieve him from the penalty.

 

Should every beneficiary who is eligible for the IRS relief skip their RMD for 2023?

Anyone who is eligible for this relief also has the 10-year deadline looming. So, while it may be tempting to skip an RMD for 2023, that could mean more pain later when a big tax bill comes due at the end of the 10-year holding period.

 

Does the recent guidance tell us what will happen with RMDs during the 10-year period in the future?

The IRS is not tipping its hand. The latest notice says, “Final regulations regarding RMDs will apply for calendar years beginning no earlier than 2024.” Hopefully, those final regulations will arrive sooner rather than later and offer clear direction.

 

Which IRA owners get more time to complete a rollover?

While Notice 2023-54 mainly addressed RMD confusion during the 10-year rule for beneficiaries, it also provided very targeted relief to a specific group of IRA owners — those born in 1951. The Notice extends the 60-day rollover deadline for these IRA and plan account owners affected by the SECURE 2.0 increase in the first RMD age from 72 to 73.

Under the old rule, the first RMD year for account owners born in 1951 would have been 2023. Under SECURE 2.0 it is now 2024.

Some IRA custodians and plan administrators inadvertently paid out “RMDs” in 2023 to these people. Because these weren’t technically RMDs, and the account owners may not have wanted them, the IRS gives these account owners additional time (beyond the usual 60-day period) to roll back distributions received between January 1, 2023, and July 31, 2023. The extended deadline is September 30, 2023.

Such a rollover will not violate the once-per-year IRA rollover rule if another distribution was received by the individual in the last 12 months that was also rolled over. It will start a new 12-month period that will preclude a distribution received in the next 12 months from being rolled over.

Example: Mick reached age 72 in 2023. He was unaware that SECURE 2.0 delayed the RMD age to 73. On January 10, 2023, he took a distribution from his IRA, believing he needed to take an RMD for 2023. Mick realized his error a few weeks later. Mick has until September 30, 2023, to roll over this distribution if he so chooses. If Mick had already done a rollover of another distribution received in the last 12 months, that will not preclude him from rolling over the 2023 RMD distribution “mistake.” However, going forward, any distribution Mick takes from any IRA before January 10, 2024, will not be rollover eligible.

Membership in Ed Slott’s Elite IRA Advisor Group™  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, August 14, 2023 with permission. https://www.irahelp.com/slottreport/rmd-relief-no-thank-you. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, The Elite Advisor Group™, or Sarah Brenner, JD.

CSP #328338 Exp 11.7.24