Transcript:
Greg Corombos, News Director at Radio America 00:06
Hi, I’m Greg Corombos. Welcome to Banking Compliance Insights, a podcast series from Wolters Kluwer. This series was created to deliver insights on compliance trends and strategies for navigating today’s regulatory and risk environments. Today’s episode, “Update and Current Status of IRAs: What Has Changed and What You Need to Know,” will focus on adapting banking processes and client outrage in the current environment. Here to lead our discussion on this subject is Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal, and he is joined today by Michael Schiller, a Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer’s Compliance Center of Excellence. Samir, let me pass the conversation over to you.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 00:56
Thank you, Greg. Since December of 2019, there has been a significant amount of activity as it relates to IRAs and tax-advantaged accounts, including the SECURE Act (Setting Every Community Up for Retirement), the Enhancement Act of 2019, and the CARES Act (Coronavirus Aid Relief and Economic Security Act). Today, we’ve asked Mike, an IRA and Tax-Advantaged Accounts subject matter expert from the Wolters Kluwer Compliance Center of Excellence, to join us. He’s here to help us step through and understand the provisions within these pieces of legislation and describe the impact that they have on us. He’s going to share some of the practical guidance for bankers managing tax-advantaged accounts. Welcome, Mike. Tell us a little bit about your day-to-day and what you do at Wolters Kluwer.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 01:45
Thank you, Samir. I’ve actually been with Wolters Kluwer for nearly 25 years, initially working in the sales area, and since 1997, in the Tax-Advantaged Accounts area, originally as an IRA consultant, where we specialize in assisting financial organizations with all of their tax-advantaged account needs. We primarily work with Individual Retirement Accounts or IRAs, Health Savings Accounts or HSAs, small business plans, like simplify Employee Pensions and Savings Incentive Match Plans, as well as Coverdell Education Savings Accounts. I’ve been in a management role now for just over a year. With our team of consultants, of which there are five of us, we answer telephone calls for our consulting services for financial organizations. We also do an extensive amount of on-demand or prerecorded training. That essentially sums up what I do and a little bit of my experience with Wolters Kluwer. As you’d mentioned, there have been some significant legislative changes since December of last year. The IRA-related changes applied to those accounts, owned both by individuals and those that have been inherited by a beneficiary as a result of an IRA owners’ death. The IRA owner-related changes apply mainly to those individuals who are near or at retirement. With that in mind, let’s consider some demographics. Expressly, that segment of our population is referred to as the Baby Boomers. This is the generation of people born between 1945 and 1965. I think everybody knows, but that portion of our population is 77 million people strong. From an age standpoint, the leading edge of this generation is now in their early 70s. We expect that the IRA trustee or custodian understands the rules and is administering their IRAs, as expected.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 03:43
It’s an interesting point, Mike. In the SECURE Act, I noticed that there are a lot of provisions that affect IRA owners at that age. Can you talk about some of the provisions and what those changes are?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 03:57
Absolutely. First, the age at which traditional IRA owners must begin taking required minimum distributions, or RMD’s, from their IRAs has been moved back. Anyone that was not age 70 1/2 by the end of 2019 can wait until the year they attain age 72 before having to begin taking traditional IRA RMD’s. Another SECURE Act change that applies to individuals in this age segment of our population is that beginning for the tax year 2020, and there is no longer an age restriction to make a traditional IRA regular contribution.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 04:34
There are two things you’re saying that I want to dig into. If I was planning to retire at age 70 1/2, and now it’s age 72, are there any requirements that the bank needs to do to notify me, or does the IRS notify me, or how do I know that? Let’s say I’m just the regular consumer that’s not really necessarily watching the news or the financial regulations very closely.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 04:57
The IRS has released some information on what it has in mind as far as making IRA owners aware of the fact that these rules have changed. However, those indications aren’t anything, or those requirements aren’t anything that needs to be acted on immediately. I’ll discuss some of what a late notice the IRS indicates, and what the amendment requirements might be. But in short, at this point, the best way for financial institutions to inform their IRA owners of these changes is to educate them. That’s either going to be through conversation, or a lobby brochure or something to that effect. But it’s absolutely critical that IRA owners are made aware of changes because right now, their IRA plan documents really don’t reflect the current rules in many cases.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 05:46
The second thing that you were talking about was removing an age restriction. That age restriction, what guidance is there on that? Can I make contributions even if I’m taking a distribution? Or is that you’re either in one mode where it doesn’t matter how old you are until you start taking distributions, you can still contribute?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 06:03
That’s actually a very interesting observation. Under the old rules, pre-SECURE Act rules, the way it worked is the year an individual attained age 70 1/2 was the year they could no longer make regular contributions. It was that year for which they had to begin taking distributions. Prior to 2020, the old rules applied, pre-SECURE Act rules, if you will. Again, mandatory distributions had to start upon an individual attaining age 70 1/2, and they could no longer make regular contributions. One of the things with this change is that if an individual wants to continue to make regular contributions, after attaining age 70 1/2, they still need to have compensation—that has always been a requirement. That rule has not changed. In addition to the changes the SECURE Act has made with IRAs owned by individuals, we should also really think about the changes that have been made to inherited IRAs. The SECURE Act created a new classification of beneficiaries, Samir, referred to as an “eligible designated beneficiary.” It’s essential to point out that upon the death of an IRA owner, depending on how a beneficiary is categorized, an individual who inherits an IRA after 2019 will either be classified as, with a SECURE Act rule called an eligible designated beneficiary, or just a designated beneficiary.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 07:35
There’s a distinction there, Mike, and I want to be very clear so it doesn’t get muddy for our listeners. Before we go over the designated eligible beneficiary, let’s go over the basics of what designated beneficiary really means.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 07:49
A designated beneficiary is a beneficiary that has a life expectancy from which they can take distributions, that’s at least under the old rules. An eligible designated beneficiary going forward is the only type of individual that can take distributions using life expectancy. In other words, when we talk about designated beneficiaries and eligible designated beneficiaries, I know we’re talking semantics here. Still we need to differentiate that from a person, individual, or entity that is a named beneficiary. Anything or anyone can be a named beneficiary that inherits assets from an IRA upon an IRA owner's death. If it’s an individual, that’s where a distinction is made between an eligible designated beneficiary, who essentially still has the options available that they did under the old rules, versus a designated beneficiary. Now, when we talk about an eligible designated beneficiary, those are individuals who are going to be given special treatment. They can still take distributions using their life expectancy, which essentially is going to extend the distribution period, and that would include the IRA owner’s spouse, the IRA owner’s minor child, someone who is chronically ill or disabled, or any other individual who is not more than 10 years younger than the IRA owner.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 09:25
That preserves the tax-advantaged portion if you fall into that category. Right?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 09:31
I think that’s a fair statement. Absolutely, because again, it’s generally going to extend the distribution period for that group of beneficiaries if they want to use life expectancy. Now, the designated beneficiary classification of an individual, an example would be an IRA or adult child, would not have all of the options available like life expectancy and those things. That’s a case where the 10-year rule applies, and the 10-year rule is actually a new provision under the SECURE Act. We look at beneficiaries that are more restricted and may not have that tax advantage like you just indicated, those are individuals are referred to as designated beneficiaries. Again, the 10-year rule is essentially what their option is going to be unless they want to take a lump-sum death distribution anytime. This provision also applies to certain trusts.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 10:37
What are the actual terms of the tenure rule?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 10:40
Under the old rules, pre-SECURE Act rules, I should say, there was this provision called the five-year rule. And the five-year rule for individuals no longer exists. But I want to draw a parallel to that because under the five-year rule if an individual was subject to distributing money under that provision or assets from an IRA, they could take as little or as much as they wanted during a five-year period as long as the balance of the IRA was fully withdrawn at the end of the fifth year after the IRA owner’s death. Now, we kind of assume the 10-year rule is going to work the same way. But the tax law has this 10-year rule provision written in. The IRS, at this point, has not defined what they envision as the 10-year rule. It is very likely a case where a beneficiary will probably be able to take as much or as little out of an inherited IRA as they want during that 10-year period. Or, they may choose to not take anything until the end of the tenth year at all if they don’t want to. But again, we can’t definitively say that until the IRS comes out with regulations defining it more specifically.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 11:52
Yes, and it makes a huge, huge impact on those that are either giving the inheritance to family members, designated beneficiaries or eligible designated beneficiaries in this case, and just wealth management in general. Right? Now you’re being forced within a 10-year period, which sounds good if it’s up from the five years. But what happens if you miss the window? What if you go beyond 10 years? Are there penalties involved or do we anticipate penalties?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 12:24
A very interesting question. Tax law and regulations are very specific as far as penalties regarding an individual’s failure to take a timely distribution. Of course, the IRS is in business to collect tax revenue, and when we look at traditional IRAs, those accounts are maintaining a whole lot of tax-deferred earnings. In the case of deductions that were taken at the time of regular contributions, that money is waiting to be taxed as well. In the old world, pre-SECURE Act rule, they should say under the five-year rule, if money wasn’t withdrawn by the end of the fifth year, there was a potential for a 50 percent penalty on the balance of the IRA. Assumably, it’s probably going to be the same thing with the 10-year rule. I shouldn’t say assumably. It’s more than likely because the tax law basically is written in that manner. Anybody who fails or if a distribution is not taken timely, a 50 percent penalty tax applies. That’s something that an IRA owner has to have a discussion about with his or her accountant. Yes, to answer your question. In short, there are absolute penalties for failing to distribute assets from an IRA timely, whether it be an IRA owner while living or a beneficiary after the death of an account donor.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 13:40
Wow, that’s really harsh. Are there any provisions that relate to an IRA to IRA transfer where penalties may not be there or avoidance of distribution rules?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 13:52
An individual, whether it be an IRA owner or a beneficiary of, certainly can transfer IRA assets anytime they want. However, they need to be very aware of the fact that if the required distribution is due, they can’t get by from having to take that required distribution by just transferring to another financial organization. Whether the money is maintained with one institution the entire year or somebody transfers partway through the year, the required minimum distribution is still something that needs to be taken by the end of the year to avoid potential penalties. One of the other things that is worth mentioning, and this rule has not changed either, is a non-spouse beneficiary who inherits an IRA needs to continue taking death distributions using whichever rule applies. Whether they’re an eligible designated beneficiary and they have the life expectancy option, or they’re subject to the 10-year rule as a designated beneficiary. The bottom line is a non-spouse beneficiary cannot transfer money into their own IRA. They’re subject to the inherited or beneficiary IRA rules.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 14:59
Some pretty significant changes. Are there any other exceptions that you wanted to call out or help us understand?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 15:05
There is one other thing that is worth mentioning. For people that are interested in helping or using their IRA to pay for birth or adoption expenses, there’s a provision that allows a $5,000 penalty-free distribution. It’s in aggregate, though, so if somebody has multiple IRAs, they can only take the total from the different IRAs they own. In a case where there are two parents, each is eligible to take up to $5,000 for qualified birth or adoption expenses. Now, another interesting part of this provision is the fact that they can repay these distributions under certain circumstances.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:44
I want to shift gears just a tad. Let’s go to the CARES Act and understand some of the shift and what that means for IRA and tax-advantaged accounts. Let’s walk through the provisions that have impacted the same set of accounts from CARES.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 15:59
Yes, absolutely. The CARES Act was a pretty significant piece of legislation in and of itself. Interestingly enough, had we just received the SECURE Act or the CARES Act, one or the other, we would have been busy updating all of our products and everything. But the CARES Act rolls around, and it’s passed by the President or signed into law by the President in March. The first thing I think is worth mentioning is very significant in 2020, and that’s the fact that nobody is required to take a distribution from their IRA this year, whether it be an IRA owner or a beneficiary who has inherited an IRA. Required distributions are essentially waived for all of 2020.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 16:37
There are two things that concern me about that. One is, what impact does that have on banking systems or the ability to administer those accounts? Two, if I am somebody who wants to take advantage of the situation, is it really an advantage, or do you anticipate in 2021 that I’m going to have to take that distribution anyway? Or is it really just a deferred distribution, and you never have to take it in 2020, and you go back to your regular distribution in 2021?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 17:03
Great questions. First is the impact on data systems. A lot of individuals, whether it be IRA owners or beneficiaries, asked financial organizations to setup auto distributions. We took a lot of calls as soon as the CARES Act was passed. When I say we took a lot of calls, the Tax-Advantaged Accounts Consulting team, our Consulting Services, took a lot of calls regarding what an organization does if an individual’s required distribution went out. That’s how their data system was set, was to send it out. The IRS actually addressed in a notification that they were eligible to bring that money back. Financial institutions did have a lot of, I don’t want to say rework, but there was a lot of extra administrative work that they were doing as a result of auto distributions being paid out and then being brought back by IRA owners and beneficiaries. From a data system standpoint, I think most of that is now behind us. I can’t say for certain. Then the other question you had is regarding their waived required distribution for 2020, and it is waived. Nobody has to take it. 2021 starts a new year. Anybody that is in the distribution in 2021 will basically pick up from where they left off in 2019. Nothing has to be taken at all in 2020. I want to clarify a little bit more about the ability of an IRA owner or a beneficiary to bring that money back and redeposit it to an IRA. The tax law says that a required minimum distribution is not eligible for rollover. Because the CARES Act waives required distributions for 2020, it’s these withdrawals that are classified as required distributions, so there isn’t really a conflict in the law. The interesting thing that I think is worth mentioning is the fact that non-spouse beneficiaries have been given the ability to return or bring back as a rollover, a death distribution that has been paid out. This is the first time I can remember in my 25 years of experience working with IRAs that a non-spouse could actually bring money back and roll it into an IRA. They’ve been given some extra consideration this year as well.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 19:15
Help me understand that just a little bit more. In this case, the non-spouse beneficiary takes a distribution from a mandatory perspective, let’s say 2019 in 2020. They can take those funds and essentially just roll them over into a new fund?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 19:29
Yes. Only 2020 required distributions are eligible for redeposit as a rollover.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 19:34
Because they’re not required, right?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 19:36
It’s a little bit more than that for beneficiaries. A non-spouse beneficiary is never allowed under the tax law to complete a rollover of any death distribution amount, whether it be the required distribution amount or any amount greater than that. A non-spouse beneficiary under the tax law cannot do a rollover. But because of COVID-19, the CARES Act waived required distributions because a lot of those distributions had been auto paid out. The IRS came out and said, “OK, here’s what we’re going to do in 2020 and for 2020 distributions only. We’re going to allow IRA owners to bring back their required minimum distributions. And we’re going to allow non-spouse beneficiaries to do the same thing.” But this is the only time like I said, that has happened. Now, IRA owners, generally, who take distributions, can redeposit them as a rollover with the exception of required distribution under normal circumstances. But again, this year is anything but normal. Anything can be rolled back up to the required distribution amounts only.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 20:40
Tell me more. Mike, what about Roth’s?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 20:43
Under the CARES Act, in addition to the fact that IRA owners and beneficiaries don’t have to take required distributions, it does create an interesting scenario for an IRA owner who wants to convert money to a Roth IRA. The purpose of doing a conversion is obviously a tax strategy. It’s going to cost an invisible tax liability upfront on the traditional IRA distribution side. They put the money in the Roth IRA as a conversion contribution. Then they potentially reap the benefit of tax-free earnings after a five-year taxable or holding period. The interesting thing under the tax laws is that an individual who is in mandatory distribution status, and this is IRA owners only. It does not apply to beneficiaries. If an IRA owner wishes to convert a traditional IRA to a Roth IRA, they can do so. But if they’re in distribution status, the required minimum distribution amount must be satisfied first. It has to be taken and pocketed, and then the balance or any amounts left in their traditional IRA could be converted to a Roth IRA. With the fact that required distributions in 2020 have been waived, a traditional IRA owner doesn’t need to worry about taking a mandatory distribution prior to doing a conversion of any amount. Certainly the advantage to that individual, in either case, the money is going to be taxed, whether they take it as a distribution or they convert it. But the benefit is they’ll be able to sock more money away into their Roth IRAs. They want to convert in 2022.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 22:17
So, that’s going to have significant personal gain for those individuals taking advantage of that? Granted, you have to pay attention to the tax table, but there is an opportunity for that.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 22:26
Absolutely. I’ve been in this business since Roth IRAs have been available, and I believe they were passed as part of the Tax Act back in 1998—the Taxpayer Relief Act, if I recall correctly. The bottom line is a lot of individuals did convert the first few years Roth IRAs existed. But there are people that are still continuing to convert, and we get a lot of questions on our consulting line. Again, that segment of our population, the Baby Boomers, have started reaching retirement age. They’re thinking about how to preserve money in the Roth IRA or their heirs. What better way to do it then potentially convert to a Roth IRA. The IRA owner pays the taxes, and then they designate the IRA to a beneficiary upon their death.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 23:13
That makes a lot of sense. Tell me more. What else applies to the CARES Act in 2020 that an individual can take advantage of?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 23:22
We absolutely can’t ignore COVID-19 and the pandemic. Congress wrote in a provision that allows an IRA owner to take a coronavirus-related distribution from an IRA. Again, this applies to an IRA owner, not a beneficiary.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 23:40
This means that if you were in financial distress and you had a retirement account, you have another avenue that they’re opening up to provide relief?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 23:49
Essentially, yes. In the world of retirement plans, as I’m sure you know, Samir, if an individual is younger than age 59 1/2, and if they take a distribution from a retirement plan or from an IRA, the taxable portion is subject to an additional 10 percent penalty tax. It just seems logical that that 10 percent penalty tax exists to discourage people from tapping into their retirement plans too early in life. But age 59 1/2, that penalty tax goes away. Now, there are several reasons an individual can take distributions from their IRA before 59 1/2 and avoid that 10 percent additional tax. Disability is one, higher educational expenses, as you heard me mention earlier, is a new provision under the SECURE Act for birth and adoption expenses, and now under the CARES Act coronavirus-related distribution, but it can be taken only by an individual who has been directly affected by the virus. Examples being having been diagnosed with the virus, or a spouse or dependents have been diagnosed, or as a result of the virus, they face financial difficulty. Earlier this year, by the way, the IRS did release Notice 2020-50, which does provide some really good guidance on this provision.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 25:02
Are these distributions repayable without penalty as well?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 25:06
Another really good question. Absolutely, the tax law has a provision written into the CARES Act, where if an individual chooses, they can redeposit that distribution over a three-year period. Now, it’s a case where if somebody takes advantage of redepositing that money, they would likely need to amend the previous year’s tax returns to collect any taxes that they paid on the original distribution. So, they don’t pay the money back. They were able to take it without incurring a 10 percent penalty tax. But if they do pay it back, they have a three-year period to do so.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 25:41
That puts an extra burden then on the banks that hold those accounts. First thing, it’s the writing on the wall. Take the money if you really, really need it. But note, if you plan to repay some of it because you don’t use it, it’s a big tax burden, right? You’re going to have to do a lot of paperwork, file it in the right way. There may be multiple years of tax amendments. How about on the bank side of that? Will they have to file on behalf of their clients as well?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 26:06
The only thing a financial institution, or an IRA custodian, or trustee, will have to do is report the deposit back, or the repayment as the tax law calls it. With the CARES Act being a piece of legislation that took place in 2020 and is effective for 2020. We have to wait and see how the IRS wants the repayments reported on a 5498. Those 2020 reporting instructions will likely shed some more light on that when they come out.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 26:39
Let’s say you’re an IRA trustee with both of these Acts that you’ve explained to us in mind. What should we be doing to make sure that the IRA program complies with all of these changes?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 26:52
Many smaller finance organizations that have IRAs are challenged with staying in front of the rules and regulations. They often overlook the complexity and the impact that rule changes have on operating systems. And for that matter, their procedures and transaction documents should all likely be reviewed. To maintain compliance, an organization should definitely be in tune with rules. They need to have that comfort level to confidently work with their IRA owners and beneficiaries. So, knowing when they answer questions as an IRA trustee versus when, for example, not to answer questions, because it might cross the line of giving tax advice. They need to know when to send their customer to their accountant or attorney. I think that organizations should really keep in mind when dealing with IRA owners is in many cases where they’re probably dealing with that individual's single largest asset and the trust they have placed in their custodian/trustee is significant. It’s important that organizations be aware of the rules, they are on top of the rules, and they take the time to educate their staff. I think it’s simply a case where organizations are going to continue seeing their IRA portfolios balance increase. We get larger as we have more people retiring.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 28:16
In your day-to-day work, what are the observations you see that both individuals and institutions need to make changes to regarding these Acts?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 28:28
As far as the changes that they need to make, I believe the biggest thing that they need to keep in mind is that the changes can have a significant effect on their IRA owners. Organizations should be aware of the fact that if a traditional IRA owner, who is 70 1/2 or older, now wants to make a contribution to his or her IRA, they can do so considering the finance organization and amend their IRA agreement. But the other thing that’s important is that organizations need to be aware of the fact that the required minimum distribution starting point for traditional IRA owners is the move back to age 72. And to answer your question, it really comes down to education, being aware of the rules, and letting your staff know that these rules have changed. When IRA owners come in to ask questions, or beneficiaries of IRA owners when they come in ask questions, they’re not intimidated by the questions. They have the confidence level to answer that question, and quite frankly, the best way to find that competence level is by education, reading, being aware of what is in the IRA documents, how they work, and reading the instructions in those documents.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 29:45
Let’s talk about those documents a little bit further. You reference them a few times. What more is there to know? What does Wolters Kluwer in your day-to-day advise?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 29:57
With the significance of these two tax Acts that we’ve highlighted today, the SECURE Act passing in December of last year, and then the CARES Act of March of this year. The Tax-Advantaged Accounts Consulting team was extremely busy updating all of our ancillary transactional documents. It was a huge undertaking to get everything updated provided to our partners and making them available for IRA custodians and trustees to access. However, when we talk about the IRA plan document, the establishment document, which essentially becomes a legal, contractual agreement once an IRA owner establishes that IRA. We can’t update that automatically because our documents are based on an IRS Model Agreement. So, the IRS has model agreements for traditional IRAs. For Roth IRAs, they have a custodial version, and they have a trust version. The IRS finally, on September 2, did release Notice 2020-68. It does provide, in the form of questions and answers, some of the concerns regarding some of the specific provisions on the SECURE Act and the Bipartisan American Miners Act of 2019. So, and this is what I referenced earlier, the Notice clearly indicates that post-age 70 1/2, the traditional IRA contribution provision of the SECURE Act can be taken advantage of by financial organization if they want to. They’re not required to accept post 70 1/2 contributions, though. However, they can choose to accept them.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 31:38
So, if I’m a 70 1/2-year-old individual, and I’ve got a long-standing IRA with a financial institution. I haven’t received a new contract for the account and how the account is managed. If I’m paying attention to the legislation, I know that something has changed. What are my options?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 32:00
We get these calls that are on our consulting service on occasion. IRA owners will hear something before a financial institution does. So, a finance organization may be in a position where not every owner who’s aged 71 or 72, or whatever the case is, they are 75. They come in, and they’d like to make a traditional IRA contribution. The finance organization isn’t aware of the rule change, and they say, “You can’t do that.” Well, that rule has again changed. But there’s one caveat to that. This Notice 2020-68 that I mentioned, in it the IRS states that an organization does not have to accept these contributions by individual 70 1/2 or older, but if they choose to, the notice states, “The IRA custodian/ trustee is required to send an amendment and a new disclosure statement to each existing IRA owner regarding the acceptance of post 70 1/2 contributions. Furthermore, IRA custodians and trustees must deliver copies of the amendment to IRA owners no later than the 30th day after the later of the date in which the amendments adopted, or the date of the amendment becomes effective.” Essentially, for an organization to allow traditional IRA owners to make contributions in their 70 1/2 year or subsequent year looks like an amendment is required.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 33:19
That is an interesting situation that is almost tough to navigate. To make sure I understand it right, financial institutions can market to individuals to open new accounts. They can continue to contribute to their IRAs and other tax-advantaged accounts for the bank. This increases their own capital ratios and strengthens their balance sheet.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 33:41
Getting the competitive edge because we’ll allow all contributions upon attainment of age 70 1/2, and your current custodian might not. An interesting viewpoint that I can see happening actually with some institutions that aggressively market their IRA program. Again, if an organization wants to expand that IRA portfolio, there are definitely opportunities. On our consulting line, we take calls where IRA owners are interested in contributing to their IRA upon attaining 70 1/2, but under the old rule, they couldn’t. Now they’ll be able to as long as the financial organization acting as custodian/trustee takes the appropriate steps allowing for it.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 34:20
It just seems that this can become a major and significant balance sheet play from a very strategic standpoint of larger institutions. Right? They want to deploy funds in a good way into the economy to stimulate it. But it takes precise navigation and strategy between all the different types of accounts on the ledger. This is just another one of those types of accounts. And as I hear more information from you on this, if I was running a bank, it’s something that would be on my radar.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 34:50
Samir, the bottom line is when financial organizations are working with their IRA owners, in many cases, they’re dealing with that their IRA owners’ single biggest asset. As we see our population aging, and those retiring who have worked for a company for a decade, two, or maybe three decades, or maybe more. They roll over their employer plan 401K, profit sharing, pension, or whatever. We’re not talking $10,000 or $20,000 rollovers, and we’re talking rollovers into the hundreds of thousands of dollars or worth a million or more. With financial organizations, if they are going to administer these accounts, it’s critical that they be aware of the rules so they’re taking care of their customers.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 35:36
Are there regulations limiting how much of these funds can be transferred at a bank as opposed to the individual, or is this really freedom of choice for the client?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 35:48
Yes, it really is freedom of choice. Obviously, the biggest thing in mind is FDIC insurance because IRAs are covered. The investment in an IRA might, or in some cases is not covered by FDIC insurance. Certainly, a Certificate of Deposit held in an IRA is covered. A savings plan under an IRA is covered. But, self-directed types of investments, like mutual funds and securities, might not be. We don’t really get into the FDIC insurance coverage discussion too much. But to answer your question, there really isn’t a limit as to the amount an individual can move from an IRA to a financial organization. It’s just what type of insurance coverage and diversification and those types of things. Do they want to take advantage of it?
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 36:34
Let’s say an institution goes forward and wants to notify all their clients and give them notices. What other steps need to be taken in order to make sure that these changes take place?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 36:44
Notice 2020-68 really only addresses that one legislative change—the post-70 1/2 contribution. It doesn’t really address the later age at which somebody can start taking required distributions and those other things. The Notice doesn’t specifically address those things. One thing that the Notice does say is that the deadline for financial organizations to amend the document governing an IRA for the provisions of the SECURE Act or regulations thereunder is December 31, 2022, or such later date as prescribed by the Secretary and guidance. Wolters Kluwer is going to carefully watch for the IRS to update its 5305 model documents. We can update our documents that the model documents are based on. We are updating our four P’s disclosure statement that is contained as part of the IRA organizer, which is the Wolters Kluwer document. The disclosure statement is going to encapsulate all of the changes that have taken place. We’re waiting for the IRS to release its cost of living adjustments in October here, and we’ll write those in. One of the things that I do want to point out is the IRS hasn’t updated the model documents to 5305. That might sound a little confusing, so let me explain just a little bit more. When an organization establishes an IRA, the rules require they provide the individual with a model document and a plain language disclosure statement, which includes the financial disclosure. The IRS hasn’t updated the model document yet, but we are updating our disclosure statements. In a sense, part of the Wolters Kluwer organizer establishment document will reflect the new rules.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 38:37
It's almost like two updates seem to take place. Even if you’re a client of Wolters Kluwer or a client of another administrator of these documents, it looks like two updates, and you better anticipate those.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 38:47
Yes. When we analyze that just a little bit more, we need to look at number one, IRS Notice 2020-68 and what it says. You have organizations to accept post-age 70 to have contributions in an amendment to the agreement is necessary. We’ll have the document in plain language disclosure available this fall in order for organizations to allow that. The rest of the provisions are not necessarily going to be available to incorporate until, as I said, the IRS updates this model document, or at least we won’t have that model document to provide as part of the IRA organizer and an amendment until the IRS is done with its share.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 39:27
Are there any other things our listeners may want to know as it relates to IRA’s?
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 39:33
As far as the required distributions go, there is one interesting thing because it will be far-reaching. As our population has aged and life expectancy changes over the years, the IRS has been tasked with updating the life expectancy divisors, which are included on a series of life expectancy tables. The last time they updated these life expectancy tables, Samir, was in 2002. Actually, it was in 2001 effective for 2002, perhaps. In any event, the IRS has released a proposed regulation, which includes the updated life expectancy divisors. But they have not yet indicated bundles. Life expectancy devices are going to be effective for calculating required distributions. It’s likely it could be 2021. But we’re within three months of that now, so with everything going on in 2020, there is obviously the possibility that they could push the effective date for the new life expectancy tables out to 2022. The reason I say that’s going to be a far-reaching issue is that organizations, in many cases, have software that does calculate distributions for account owners and beneficiaries, with a series of three tables and multiple life expectancy devices on each table. It could require a lot of data system programming.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 40:49
That makes a lot of sense. I still can’t believe it’s 18 years old, going on, basically 20 years to be an update. I would have expected it to update with the census. Mike, it’s been a pleasure speaking with you. I can tell you I have learned a tremendous amount just in our short conversation around this topic. I hope that other listeners have also seen the benefit of paying attention to this, and potentially even for their larger cohorts in their business, of building a strategy around tax-advantaged accounts. Thank you. I look forward to our next conversation in the future.
Michael Schiller, Manager of Specialized Consulting for Tax-Advantaged Accounts with Wolters Kluwer 41:24
Thank you, Samir. It’s been a pleasure discussing IRAs and a lot of the changes that have taken place. I am also looking forward to our next opportunity to discuss other rules and regulations.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 41:34
Greg, let me turn things back over to you.
Greg Corombos, News Director at Radio America 41:36
That’s Wolters Kluwer Vice President for Banking Compliance Solutions, Samir Agarwal, joined by Michael Schiller, Manager of Specialized Consulting in the Tax-Advantaged Accounts area. Wolters Kluwer is the host of this podcast and a market-leading provider of advisory services and technology solutions for optimizing compliance and risk management programs. For more information and additional guidance, please visit WoltersKluwer.com or call 1-800-397-2341. Please join us for future podcasts focused on navigating emerging trends in regulatory compliance.
