New Guidance on Required Minimum Distributions from the IRS

New guidance to offer some relief to new rules and reduce confusion

The IRS is working to make the transition to the new retirement rules a little easier. They just released some guidance that offers temporary relief for when you have to start taking required minimum distributions (RMDs) from your retirement accounts. This is all part of the new laws included in the SECURE Act and SECURE 2.0 Act that changed the age when RMDs kick in. The newly released guidance also extends relief for plan participants who inherited IRAs or other kinds of retirement plans and have to follow the “10-year rule.”

The need for RMD relief

In 2019, the SECURE Act brought numerous changes to the retirement and estate planning game. One of the biggest changes was that it raised the age at which people have to start taking their required minimum distributions (RMDs) from their retirement accounts. Instead of starting at age 70½, which was the deal before, now it’s been pushed back to age 72.

Then, in December 2022, the SECURE 2.0 Act increased the required beginning date age for taking required distributions even more. For 2023, the age increased to 73 and it is scheduled to climb to 75 in 2033.

Now, while it’s great news for your income taxes to have a little more time before taking those RMDs, the new law created some confusion for retirees and plan administrators. Some retirees who turned 72 this year, thinking they had to start their RMDs by April 1, 2024, may have already started taking their distributions.

Plan administrators have also expressed concerns if they are unable to update their systems in time. If a distribution is mischaracterized, plan participants could end up paying extra taxes. For example, if someone who turned 72 in 2023 received their distributions this year, without enough time for proper implementation, the plan might mistakenly treat them as RMDs. And because RMDs can’t be rolled over into another retirement plan tax-free – these distributions are included in the recipient’s taxable income.

The IRS response

To address these concerns, the IRS extended the 60-day deadline for rollovers of distributions that were mischaracterized as RMDs due to the change in the RBD from age 72 to age 73. The deadline for rolling over such distributions made between January 1, 2023, and July 31, 2023, is now September 30, 2023.

For example, if a plan participant born in 1951 received a single-sum distribution in January 2023, 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 roll over that portion of the distribution. If the deadline passes without the distribution being rolled over, the distribution will then be considered taxable income.

The rollover also applies to mischaracterized IRA distributions made to an IRA owner (or surviving spouse). It applies even if the owner or surviving spouse rolled over a distribution within the previous 12 months, although the subsequent rollover will preclude the owner or spouse from doing another rollover in the next 12 months. (The individual could still make a direct trustee-to-trustee transfer.)

Plan administrators and payors receive some relief, too. They won’t be penalized for failing to treat any distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) as an eligible rollover distribution if the distribution would’ve been an RMD before SECURE 2.0’s change to the RBD.

Issues with the 10-year Rule

Prior to the enactment of the original SECURE Act, beneficiaries of inherited IRAs could “stretch” 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 longer.

To accelerate tax collection, the SECURE Act eliminated the rules permitting stretch RMDs for many heirs. For IRA owners or defined contribution plan participants who died in 2020 or later, the law generally requires that the entire balance of the account be distributed within 10 years of death.

According to proposed IRS regulations released in February 2022, designated beneficiaries who inherit an IRA or defined contribution plan before the deceased’s required beginning date can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includers the 10-year anniversary of the death. Notably, though, if the deceased dies on or after the required beginning date, designated beneficiaries would be required to take taxable annual RMDs (based on their life expectancies) in years one through nine, receiving the remaining balance in year 10. They can’t wait until the end of 10 years 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’re working.

IRS waives enforcement to help

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 in 2020. These heirs hadn’t taken RMDs in 2021 and were unsure whether they were required to take them in 2022.

To help alleviate some confusion, 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 RBD.

The relief means covered individuals needn’t worry about being hit with excise tax equal to 25% of the amounts that should’ve been distributed but weren’t (or 10% if the failure to take the RMD is corrected in a timely manner). And plans won’t be penalized for failing to make an RMD in 2023 that would be required under the proposed regs.

Final regs are pending

The IRS also announced that final regs related to RMDs will apply for calendar years to no sooner than 2024. Previously, the agency had said final regs would apply no earlier than 2023. We’ll let you know when the IRS publishes the final regulations and how they may affect you. Contact us with any questions.