How to unravel complicated 2023 RMD rules

It’s no simple task to determine which clients are subject to required minimum distributions this year, and which aren’t.

As the last quarter of 2023 begins, clients will likely be asking advisors whether they’re subject to required minimum distributions. That used to be an easy question to answer both for individual retirement account owners and beneficiaries. However, as a result of the confluence of changes made by the SECURE Act, SECURE 2.0, IRS proposed regulations and recent IRS RMD relief, it’s no simple task anymore.

Here’s a guide to help cut through the confusion:

IRA OWNERS

The SECURE Act raised the RMD age to 72. Then SECURE 2.0 increased the RMD age to age 73, but only for IRA owners who will turn 72 this year or later. Anyone who turned 72 last year still had to take their first RMD (for 2022) by April 1, 2023, and their second RMD (for 2023) by the end of this year.

Anyone who was born in 1951 will turn 72 this year, so these people will use age 73 as their starting point. They will turn 73 next year (2024) and that will be their first RMD year, but they have until April 1, 2025, to take that 2024 RMD.

It’s easier to figure out if you use the year of birth.

Any IRA owner born in 1950 or earlier will have to take RMDs this year. Those born in 1951 or later will not be subject to RMDs this year. (Keep in mind that plan participants — unlike IRA owners — may be able to delay RMDs until retirement if they’re still working.)

The IRS RMD relief announced earlier this year in Notice 2023-54 applies only to retirement account owners who were born in 1951 and mistakenly took an RMD earlier this year. That may have happened after they received incorrect notices from their financial institutions saying that they were subject to RMDs for 2023, when in fact they weren’t. Anybody who took an unwanted RMD before July 31 had until Sept. 30 to return those funds.

INHERITED IRA RMDS

IRA beneficiaries who are subject to RMDs this year:

Designated IRA or Roth IRA beneficiaries (meaning the beneficiary is a person named on the IRA beneficiary form) who inherited before 2020 (pre-SECURE Act). This group of beneficiaries qualified for the stretch IRA so they must stay on their RMD schedule. None of the IRS relief for inherited IRAs applies to this group.

Eligible designated beneficiaries, or EDBs. These are beneficiaries who inherited in 2020, 2021 or 2022 (subject to the SECURE Act) and qualified to use the stretch IRA because they were in one of these five special EDB categories:

Surviving spouses.
Minor children of the account owner, until age 21 — but not grandchildren.
Disabled individuals — under the strict IRS rules.
Chronically ill individuals.
Individuals older than, or not more than 10 years younger than, the IRA owner.

These beneficiaries must continue taking their stretch IRA RMDs. None of the IRS RMD relief for inherited IRAs applies to this group. If the EDB inherited this year (in 2023), they can wait until next year to begin taking their stretch IRA RMDs.

Non-designated beneficiaries, like an estate, charity or nonqualifying trust, are unaffected by the recent changes in RMD rules, so those beneficiaries must continue their existing RMD payout schedules.

IRA beneficiaries not subject to RMDs this year:

Designated beneficiaries who inherited in 2020 or later from an IRA owner who died before reaching his or her required beginning date. These are beneficiaries who aren’t EDBs, like most adult children and grandchildren. They are subject to the 10-year rule under the SECURE Act, which requires that the entire balance in the inherited IRA be withdrawn by the end of the 10th year after death. But since they inherited from someone who died before RMDs were due, before their RBD or required beginning date, they’re not subject to taking annual RMDs for years one through nine of the 10-year term.

Designated beneficiaries who inherited in 2020 or later, from an IRA owner who died after reaching his or her RBD. These are beneficiaries who are not EDBs, so they are subject to the 10-year rule under the SECURE Act. Since they inherited from someone who died after their RBD, they are subject to RMDs for years one through nine of the 10-year term. However, the IRS, recognizing the confusion created by these rules, has said that anyone in this category (originally subject to annual RMDs under the 10-year rule), will not have to take RMDs in 2021, 2022 or 2023. There will be no RMD penalty for missing these RMDs, so they don’t have to be taken. Better yet, they won’t have to be made up in future years. However, the entire balance in the inherited IRA must still be withdrawn by the end of the 10th year after death.

Designated Roth IRA beneficiaries, who aren’t EDBs, who inherited in 2020 or later. These Roth beneficiaries must also empty the inherited Roth IRA by the end of the 10th year after death. But they are not subject to RMDs for years one through nine of the 10-year term, regardless of the age of the deceased Roth IRA owner. All Roth IRA owners are deemed to have died before reaching their RBD, because Roth IRA owners are never subject to lifetime RMDs.

TAKING VOLUNTARY RMDS

Now you should understand exactly who is, and who is not, subject to RMDs this year. But that’s not the end of the story. Even if your traditional IRA beneficiary clients subject to the 10-year rule don’t have to take an RMD this year as a result of the IRS relief, you should look at the long-term, big-picture planning strategy.

These beneficiaries may still be better off taking these distributions (and maybe even larger amounts) during years one through nine. At the end of the 10-year term, all those inherited RMD funds will have to be withdrawn, likely creating a large RMD and an equally large tax bill. Taking distributions spread out over the 10-year term may very well lower the overall tax bill for these beneficiaries.

For more information on Ed Slott and Ed Slott’s 2-Day IRA Workshop, please visit www.IRAhelp.com.