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The IRS has issued new guidance providing transitional relief related to recent legislative changes to the age at which taxpayers must begin taking required minimum distributions (RMDs) from retirement accounts. The guidance in IRS Notice\u00a02023-54 also extends relief already granted to taxpayers covered by the so-called \u201c10-year rule\u201d for inherited IRAs and other defined contribution\u00a0plans.<\/p>\n
The need for RMD relief<\/strong><\/p>\n In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act brought numerous changes to the retirement and estate planning landscape. Among other things, it generally raised the age at which retirement account holders must begin to take their RMDs. The required beginning date (RBD) for traditional IRAs and other qualified plans was raised from age 70\u00bd\u00a0to\u00a072.<\/p>\n Three years later, in December 2022, the SECURE\u00a02.0 Act increased the RBD age for RMDs further. This year the age increased to 73, and it\u2019s scheduled to climb to 75\u00a0in\u00a02033.<\/p>\n The RBD is defined as April\u00a01 of the calendar year following<\/em> the year in which an individual reaches the applicable age. Therefore, an IRA owner who was born in 1951 will have an RBD of April\u00a01, 2025, rather than April\u00a01, 2024. The first distribution made to the IRA owner that will be treated as a taxable RMD will be a distribution made\u00a0for\u00a02024.<\/p>\n While the delayed onset of RMDs is largely welcome news from an income tax perspective,\u00a0it has caused some confusion among retirees and necessitated updates to plan administrators\u2019 automatic payment systems. For example, retirees who were born in 1951 and turn 72 this year may have initiated distributions this year because they were under the impression that they needed to start taking RMDs by April\u00a01,\u00a02024.<\/p>\n Administrators and other payors also voiced concerns that the updates could take some time to implement. As a result, they said, plan participants and IRA owners who would\u2019ve been required to start receiving RMDs for calendar year 2023 before SECURE\u00a02.0 (that is, those who reach age\u00a072 in 2023) and who receive distributions in 2023 might have had those distributions mischaracterized as RMDs. This is significant because RMDs aren\u2019t eligible for a tax-free rollover to an eligible retirement plan, so the distributions would be includible in gross income for tax purposes.<\/p>\n The IRS response<\/strong><\/p>\n To address these concerns, the IRS is extending the 60-day deadline for rollovers of distributions that were mischaracterized as RMDs due to the change in the RBD from age\u00a072 to age\u00a073. The deadline for rolling over such distributions made between January\u00a01, 2023, and July\u00a031, 2023, is now September\u00a030,\u00a02023.<\/p>\n For example, if a plan participant born in 1951 received a single-sum distribution in January\u00a02023, and part of it was treated as ineligible for a rollover because it was mischaracterized as an RMD, the plan participant will have until the end of September to\u00a0roll over that portion of the distribution. If the deadline passes without the distribution being\u00a0rolled over, the distribution will then be considered taxable\u00a0income.<\/p>\n The rollover also applies to mischaracterized IRA distributions made to an IRA owner (or\u00a0surviving spouse). It applies even if the owner or surviving spouse rolled over a distribution within the previous 12\u00a0months, although the subsequent rollover will preclude the owner or spouse from doing another rollover in the next 12\u00a0months. (The individual could still make a direct trustee-to-trustee transfer.)<\/p>\n Plan administrators and payors receive some relief, too. They won\u2019t be penalized for failing to treat any distribution made between January\u00a01, 2023, and July\u00a031, 2023, to a participant born in 1951 (or that participant\u2019s surviving spouse) as an eligible rollover distribution if the distribution would\u2019ve been an RMD before SECURE\u00a02.0\u2019s change to\u00a0the\u00a0RBD.<\/p>\n The 10-year rule conundrum<\/strong><\/p>\n Prior to the enactment of the original SECURE Act, beneficiaries of inherited IRAs could \u201cstretch\u201d the RMDs on the accounts over their entire life expectancies. The stretch period could run for decades for younger heirs, allowing them to take smaller distributions and defer taxes while the accounts grew. These heirs then had the option to pass their IRAs to later generations, potentially deferring tax payments even\u00a0longer.<\/p>\n To accelerate tax collection, the SECURE Act eliminated the rules permitting stretch RMDs for many heirs (referred to as designated beneficiaries, as opposed to eligible designated beneficiaries, or EDBs). For IRA owners or defined contribution plan participants who died\u00a0in 2020 or later, the law generally requires that the entire balance of the account be distributed within 10\u00a0years of death. The rule applies regardless of whether the deceased dies before, on or after the RBD for RMDs from the plan. (EDBs may continue to stretch payments over their life expectancies or, if the deceased died before the RBD, may elect the 10-year rule treatment.)<\/p>\n According to proposed IRS regulations released in February\u00a02022, designated beneficiaries who inherit an IRA or defined contribution plan before the deceased\u2019s RBD can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includes the 10-year anniversary of the death. Notably, though, if the deceased dies on or after the RBD, designated beneficiaries would be required to take taxable annual RMDs (based on their life\u00a0expectancies) in years one through nine, receiving the remaining balance in year\u00a010. They can\u2019t wait until the end of 10\u00a0years and take the entire account as a lump-sum distribution. The annual RMD rule would provide designated beneficiaries less tax-planning flexibility and could push them into higher tax brackets during those years, especially if they\u2019re\u00a0working.<\/p>\n The 10-year rule and the proposed regs left many designated beneficiaries who recently inherited IRAs or defined contribution plans bewildered as to when they needed to begin taking RMDs. For example, the IRS heard from heirs of deceased family members who died\u00a0in 2020. These heirs hadn\u2019t taken RMDs in 2021 and were unsure whether they were required to take them\u00a0in\u00a02022.<\/p>\n In recognition of the lingering questions, the IRS previously waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD. The latest guidance extends that relief by excusing 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the\u00a0RBD.<\/p>\n The relief means covered individuals needn\u2019t worry about being hit with excise tax equal to 25% of the amounts that should\u2019ve been distributed but weren\u2019t (or 10% if the failure to take the RMD is corrected in a timely manner). And plans won\u2019t be penalized for failing to make an RMD in 2023 that would be required under the proposed\u00a0regs.<\/p>\n Final regs are pending<\/strong><\/p>\n The IRS also announced in the guidance that final regs related to RMDs will apply for calendar years no sooner than 2024. Previously, the agency had said final regs would apply no earlier than 2023. We\u2019ll let you know when the IRS publishes the final regs and how they may affect you. Contact us with any questions.<\/p>\n \u00a9 2023<\/em> \u00a0<\/p>\n <\/body> The IRS has issued new guidance providing transitional relief related to recent legislative changes to the age at which taxpayers must begin taking required minimum distributions (RMDs) from retirement accounts. The guidance in IRS Notice\u00a02023-54 also extends relief already granted to taxpayers covered by the so-called \u201c10-year rule\u201d for inherited IRAs and other defined contribution\u00a0plans. 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