In an effort to streamline the regulations that govern the use of retirement accounts, the IRS has proposed a change to 403(b) plans — a type of workplace retirement plan used primarily by public sector employees and non-profit. Employer-sponsored plans are powerful retirement tools and have specific requirements regarding required minimum distributions and tax treatment that vary by account type. But soon your 403(b) might look like the more common 401(k). If you have a 403(b) retirement plan, you may need to change how you plan for your retirement and how your plan beneficiaries will receive their funds. Here’s what you need to know.
A financial advisor can help you plan for your retirement and choose investments that match your financial goals. Speak to a qualified advisor today.
Don’t miss news that could impact your finances. Receive news and tips to make smarter financial decisions with SmartAsset’s bi-weekly email. It’s 100% free and you can unsubscribe at any time. register today.
IRS Proposes Changes to 403(b) RMD
In accordance with the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the IRS is proposing updates to the existing retirement plan code that governs minimum required distributions (RMD).
Currently, 403(b) blueprints are still treated differently from 401(k) plans, with provisions that trigger special exemptions for nonprofit and service sector organizations that sponsor these plans for their employees. The IRS has historically treated 403(b) plans as individual retirement accounts (IRA), not requiring account holders to withdraw all of their funds over their lifetime and allowing savers to invest in a wide variety of financial products with tax-deferred dollars. However, with the changes introduced by the SECURE Act, 401(k) plans and IRAs now require the participant to make the required minimum distributions before age 72. Roth IRAs continue to be an exception.
In order to make 403(b) plans more similar to other defined contribution plans, the IRS is proposing a new requirement: beginning at age 72 or upon retirement, account holders will be required to take minimum distributions based on life expectancy guidelines. If the account holder dies before the funds are fully distributed, the beneficiary must withdraw all funds within 10 years of the holder’s death.
What savers need to know
To bring 403(b) plans in line with other employer-sponsored and individual retirement plans, the IRS is proposing changes to the rules governing RMDs. Going forward, any nonprofit sponsoring a 403(b) plan for its employees must take RMDs or risk employees paying a hefty tax penalty on the unwithdrawn balance.
The National Law Review notes that the proposed changes appear to pose both administrative and legal problems. 403(b) plans can be invested in a variety of funds, including group and individual annuity contractsand the obligation to pass RMDs could therefore create contractual problems.
For example, employers are not involved in the administration of individual 403(b) contracts, and so their ability to take RMDs would be significantly limited, potentially violating the new rule from the start. Even more vaguely, in order to benefit from safe harbor exemptions, the regulations limit employer participation in pension plans to specific activities. If the proposed IRS rule goes into effect and employers must then actively negotiate with providers to administer participants’ RMDs, it could violate these requirements and inadvertently subject employers to regulation and reporting. from which they were previously exempt.
Therefore, employees may not know if or when they may be required to take distributions from their 403(b) plans. The IRS directs plan sponsors to administer RMDs, but ultimately it is the member’s responsibility to ensure withdrawals are accurate and timely. If participants do not receive the required distributions, they may end up owing up to 50% of their calculated RMD in taxes.
The IRS is reviewing the proposed rule and has asked for comment. Interested parties may submit their comments through the Federal Register Portal before May 25, 2022, and a settlement hearing will be held on June 15.
The IRS is proposing a new rule requiring 403(b) plan participants to take RMDs. The proposed amendments may cause administrative and legal difficulties, particularly with respect to regulations exempt from ERISA. Penalties for not taking RMDs can be severe, so it’s important to understand what rules apply to you as a 403(b) plan participant. Comments regarding the proposed rule can be submitted until May 25, 2022.
Retirement Planning Tips
Not sure what investments or strategies will prepare you for a smooth retirement? For a solid long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Photo credit: ©iStock.com/designer491, ©iStock.com/nzphotonz, ©iStock.com/Stockphoto4u
The post office The IRS is changing how your beneficiaries receive your retirement funds appeared first on SmartAsset Blog.