Fresh IRS guidance will let taxpayers born in 1951 avoid taxes on some retirement plan distributions received through the end of July. But there’s a catch: they have to return those distributions by September 30.
This relief is provided in Notice 2023-54. In addition, the Notice provides guidance on required minimum distributions (RMD) for certain inherited retirement accounts.
Relief Related to Increased Required Beginning Date (RBD) Under SECURE 2.0 Act. Section 107 of the SECURE 2.0 Act, enacted in late December 2022, increased the RMD age to 73 for individuals who attain age 72 after December 31, 2022 and age 73 before January 1, 2033.
Prior to the passage of the SECURE 2.0 Act, individuals who turned 72 in 2022 – in other words, those born in 1950 – were required to take their first RMD by April 1, 2023. However, if an individual turns 72 in 2023 – individuals born in 1951 - the due date for their first RMD is April 1, 2025.
The RMD age will increase again, to 75, for individuals who attain age 74 after December 31, 2032.
Based on the timing of the SECURE 2.0 enactment , in 2023 some IRA custodians and plans distributed funds as RMDs to participants born in 1951. The notice provides relief for distributions made from a retirement account between January 1, 2023 and July 31, 2023 to a participant born in 1951 that would have been an RMD except for the SECURE 2.0 changes.
The class of 1951 has until September 30, 2023, to roll the funds back into their account if they did not want the distribution. If they fail to do so, the amounts will be taxed as 2023 distributions.
Waiver for Missed RMDs for Certain Inherited Accounts. The SECURE Act made big changes in how retirement plan assets must be distributed. Not only did the SECURE Act define a new class of beneficiary, the eligible designated beneficiary (EDB), it also introduced the 10-year withdrawal rule for beneficiaries not falling in the EDB class - primarily non-spouse adult beneficiaries.
From the enactment of the SECURE Act late in 2019 until the RMD Proposed Regulations were issued in February 2022, there was industry-wide uncertainty regarding the RMD requirements for inherited accounts subject to the 10-year rule. This uncertainty was fueled by IRS officials initially saying the distributions didn’t have to be made until the end of the 10-year period. As a result, many beneficiaries of inherited retirement accounts did not take annual distributions at first.
The IRS last year issued Proposed Regulations that would require non-EDBs inheriting retirement accounts subject to the 10-year rule to take RMDs during each year of the 10-year period if the plan owner had been taking RMDs prior to their death. This could have been a serious problem, as missed RMDs are subject to a 50% excise tax penalty. In October 2022, the IRS issued Notice 2022-53 which waived penalty for missed 2021 and 2022 RMDs for the non-EDBs.
Notice 2023-54 extends that relief through 2023. Therefore, if you’re a non-EDB who inherited an account on or after January 1, 2020 from an owner who died after their required beginning date, the IRS is waiving excise tax penalties for failure to take RMDs in 2021 through 2023.
Update on RMD Proposed Regulations. The Notice announced that the Treasury and IRS intend to issue final RMD Regulations, and when issued, they will apply for calendar years beginning no earlier than 2024.
Related: Omnibus Bill Brings Expanded Changes for Retirement Savings.
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