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 10th 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.