Who Will Be Subject To RMDs Before Year End?
As 2023 winds down, there’s lots of confusion on this issue mainly due to the SECURE 2.0 Act of 2022 raising the RMD (required minimum distribution) age to 73, and the IRS Proposed Regulations—February 2022 (and subsequent relief) for inherited IRAs.

For IRA Owners
The RMD age is now 73, but not everyone qualifies to use that age. The easiest way to explain this to clients is to tell them that IRA owners born in 1950 or earlier are subject to an RMD this year. Those born in 1951 or later are not.

How did we get to this conclusion? The original SECURE Act raised the RMD age from 70½ to 72, and then SECURE 2.0 increased it again to age 73. But the increase to 73 only applies to those who turned age 72 in 2023 or later (those born in 1951 or later). If your client turned age 72 last year (in 2022—born in 1950), he or she was already subject to an RMD for 2022 that could be delayed until April 1, 2023, and that schedule cannot be delayed. Their second RMD (for 2023) will be due by the end of this year.

Anyone who turned age 72 this year (in 2023—born in 1951) can use age 73, meaning their first RMD year won’t be until next year (2024), and that RMD can be delayed until April 1, 2025.

What About RMDs For The Year-Of-Death?
Death gets you out of pretty much everything in the Tax Code, but not RMDs. Even after death, they still must be taken. If you have a client (an IRA owner) who was already subject to RMDs but died this year before taking that RMD, or did not take the full amount, the RMD shortfall must be taken by the beneficiary before year end. A missed year-of-death RMD is subject to the usual RMD penalty (now 25%, or 10% if made up in two  years).

However, it’s not always possible or practical for beneficiaries to take that year-of-death RMD, especially if death was near year end. In the proposed regulations from the original SECURE Act, the IRS provided relief for this situation by allowing an automatic waiver of the RMD penalty. The only catch is that the beneficiary must take that year-of-death RMD by the beneficiary’s tax return due date (including extensions) for the year of death. For example, if the IRA owner died in December 2023, the beneficiary would have until April 15, 2024 (or until October 15, 2024, if going on extension) to take the year-of-death RMD and not be subject to penalty.

RMDs For IRA Beneficiaries
This is where it has gotten tough for advisors. The SECURE Act made major RMD changes for IRA inheritors. While these rules have been effective since 2020, the questions continue. Additionally, there have been a few twists from the IRS since then, causing even more confusion. 

For most non-spouse beneficiaries who inherited in 2020 or later, the old “stretch IRA” is gone and replaced with a 10-year rule, where the entire inherited IRA balance must be withdrawn by the end of the 10^th year after the year of death. But early in 2022, the IRS issued proposed regulations stating that beneficiaries who inherited from someone who had already begun taking their RMDs would not only be subject to the 10-year rule, but would also be required to take annual RMDs for years 1-9 of the 10-year term. These annual RMDs would be based on the beneficiary’s age, similar to how the stretch IRA had been calculated.

IRS Provides Limited RMD Relief For IRA Beneficiaries (IRS Notice 2023-54)
The IRS’ interpretation of the beneficiary RMD rules in the proposed regulations met with such surprise and confusion that the IRS waived the RMD penalty for beneficiaries subject to the 10-year rule who failed to take annual RMDs for 2021 and 2022. In Notice 2023-54, the IRS once again waived the penalty for not taking those RMDs in 2023. This means that annual RMDs for 2021-2023 do not have to be taken, and they do not have to be made up in a future year.

However, this relief created even more confusion, since not all beneficiaries were relieved of their RMDs. Beneficiaries who inherited before 2020 (not subject to the SECURE Act) still get to use the stretch IRA, and those annual RMDs must still be taken by year end, the same as in past years.

Also, any beneficiaries who qualify as EDBs (eligible designated beneficiaries) still get to use the stretch IRA, even for deaths after 2019. They too must continue on that schedule. EDBs are generally spouses, minor children of the deceased IRA owner (but only up to age 21), disabled or chronically ill beneficiaries, or non-spouse beneficiaries who are not more than 10 years younger than the deceased IRA owner (for example, a friend, partner, sibling, etc.).

IRA Beneficiaries Who Do Not Have To Take RMDs In 2023
IRA beneficiaries who inherited in 2020 or later from someone who died before beginning RMDs, and who are subject to the 10-year rule, do not have to take annual RMDs for years 1-9 of the 10-year term. So, there was no need for the IRS to waive RMDs for these people.

Roth IRA beneficiaries subject to the 10-year rule are also not required to take annual RMDs on their inherited Roth IRAs for years 1-9 of the 10-year term, regardless of whether the deceased Roth IRA owner died before or after starting RMDs. Once again, no waiver was needed.

RMD Planning Strategy
Now that you know who has to take an RMD and who doesn’t, let’s look at the long-term tax planning. Even if an IRA owner or IRA beneficiary is not required to take an RMD for 2023, should they take a distribution anyway?

It may pay to voluntarily withdraw some funds from IRAs or inherited IRAs to smooth out the tax bill over more years. For example, a traditional IRA beneficiary subject to the 10-year rule might not have to empty most or all of the inherited IRA until the end of the 10 years. But that inherited IRA could grow to be a big chunk by that time, and taxes on the withdrawal could possibly be much higher than they would be today. Spreading that income out over several years, while taking advantage of the current historically low tax rates, might save substantial taxes. (This strategy does not apply to Roth IRA beneficiaries, since they should hold the inherited Roth IRA for the full 10 years and take advantage of the income tax-free accumulations over that time).

The idea of voluntary IRA distributions goes for traditional IRA owners as well.

It could make sense for them to withdraw some IRA funds before RMDs kick in, and then convert those funds to Roth IRAs. For IRA owners already subject to RMDs, it might be wise to withdraw more than the required amount based on how much can be withdrawn while still staying in the lower tax brackets.

Below are the 2023 income tax brackets (as well as the new 2024 brackets which have been expanded due to inflation indexing). Any part of a tax bracket not used is lost forever, so don’t waste a low bracket. Also, depending on what Congress does, these low tax rates may not be around much longer. Use these brackets to help clients make tax planning decisions before 2023 comes to a close, and they’ll be sure to thank you when tax time comes around.

Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group, please visit www.IRAhelp.com. On December 13 at 1:00 p.m., Mr. Slott will conduct a webcast on Navigating Year-End Strategies with FA Magazine. To register, click here.