IRS Provides Additional Relief for RMDs in 2023
Episode 242 – IRS provides additional relief to individuals who inherited traditional IRAs in 2020 or after and failed to take RMDs, and to those who mistakenly took RMDs in 2023 when they didn’t have to.
Transcript of Podcast Episode 242
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode: IRS Provides Additional Relief for RMDs in 2023.
On December 20, 2019, the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was enacted into law. The SECURE Act changed the age when an individual needed to start taking required minimum distributions (“RMDs”) from age 70 ½ to 72 years. For inherited IRAs, the SECURE Act also eliminated the Stretch IRA concept, which allowed beneficiaries to “stretch” distributions over their life expectancies. Instead, what is commonly known as the “10-year rule” was installed. For those inheriting IRAs in years 2020 and later, the remaining account balance of an inherited IRA is required to be distributed to designated beneficiaries by December 31 of the tenth calendar year after the date of death, unless the designated beneficiary qualifies as an “eligible designated beneficiary,” a new term created by the SECURE Act. Eligible designated beneficiaries include the spouse, a disabled or chronically ill beneficiary, and a beneficiary who is not more than 10 years younger than the decedent IRA owner. They can continue to take distributions from inherited IRA accounts over their life expectancies, subject to certain other rules that we won’t discuss here.
Since the passage of the SECURE Act, most tax professionals and indeed, the IRS itself, interpreted the 10-year rule to mean that when the participant died, the designated beneficiary did not need to take any distributions from the IRA until the end of the tenth year, following the participant’s death.[i]
On February 23, 2022, however, the IRS released proposed regulations containing a big surprise. The proposed regulations provided that if the plan participant died on or after her required beginning date (i.e., age 72), then under the 10-year rule, the designated beneficiary is required to take required minimum distributions in years one through nine, based on their life expectancy, and the remaining account balance in year ten. If the plan participant died prior to her required beginning date, then under the 10-year rule, the designated beneficiary is not required to take RMDs, but must take the account balance out by the end of year ten.
Of course, the legislative changes and unanticipated IRS position on the required minimum distributions during the 10-year period, caused widespread confusion and anxiety that wasn’t helped by the failure of the IRS to issue final regulations in 2022. Fortunately, on October 7, 2022, the IRS issued Notice 2022-53 waiving penalties on missed RMDs for 2021 and 2022 on IRAs inherited from an IRA owner who died in 2020 and 2021. Final regulations were still not issued thus far in 2023. Instead, on July 14, 2023, the IRS issued Notice 2023-54 which, once again, waived penalties on missed RMDs in 2023 on inherited IRAs. That also applies to IRAs inherited from IRA owners who died in 2022.
This latest IRS Notice also provides relief to taxpayers and administrators for a new problem for regular RMDs by IRA owners. On December 29, 2022, the Consolidated Appropriations Act, 2023 (“the Act”) was enacted and it included the provisions for Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (commonly dubbed “SECURE 2.0”). SECURE 2.0 increased the age for individuals to commence taking RMDs from age 72 to age 73, if attained in 2023 or later (and to age 75 if attained in 2033 and later). Because of this new age change to take RMDs, some taxpayers mistakenly took RMDs when they didn’t have to. Normally, RMDs may not be rolled over, but this IRS Notice allows taxpayers to rollover the distributions that were not required, so long as it is done by September 30.
As you can tell, it is a very confusing and complicated process with respect to whether RMDs are required to be made or not for those who recently attained the ages of 72 or 73, or for those who recently inherited an IRA. Note, however, that if you were subject to RMDs before all these new legislative changes occurred, nothing has changed. You are still required to take your RMDs for 2021, 2022, and 2023. Therefore, you should consult with your tax or legal advisor with regard to your own situation.
[i] In the 2021 version of IRS Publication 590-B, the IRS advised: “The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December 31, 2031. The beneficiary is allowed, but not required, to take distributions prior to that date (emphasis added).”
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