August 14, 2023

Family Finances

Another IRS Rule Change For RMDs!

The original SECURE Act enacted back in 2019 made two notable changes (among many) for those who owned retirement accounts.

  1. The first major change increased the age at which account owners must begin taking Required Minimum Distributions (RMDs) from their tax-deferred retirement accounts from age 70 ½ to 72.
  2. The second major change addressed how retirement accounts were distributed after the owner’s death. This change aimed to reduce the classes of beneficiaries allowed to stretch out RMDs over their remaining lifetime.  The SECURE Act introduced a new 10-year distribution period for “Non-Eligible Designated Beneficiaries”; those who are NOT a surviving spouse or those who fall under a small number of limited exceptions.

The general industry consensus around this new 10-year distribution period was that beneficiaries were not required to take specific annual distributions so long as the entire account balance was distributed by the end of the 10th year.  The IRS issued new guidance in February of 2022 that further complicated the matter.  The IRS proposed two different distribution regimes based on the age of the decedent.

  1. If the decedent passed away PRIOR TO commencing their own Required Minimum Distributions (the IRS calls this milestone the Required Beginning Date), then the beneficiary needs only to withdraw the entire account balance by the end of the 10th
  2. If the decedent passed away AFTER commencing their own RMDs, then the beneficiary must withdraw the entire account balance by the end of the 10th year AND adhere to the decedents original RMD schedule.

As you can imagine, this caused tremendous confusion amongst account owners and beneficiaries, but also forced the industry to perform a rapid overhaul of its systems and processes to calculate Required Minimum Distributions.  The IRS then issued a notice in October of 2022 that waived any penalties associated with Non-Eligible Designated Beneficiaries missing their RMDs for 2021 and 2022.  Essentially, beneficiaries were given relief from their 2021 and 2022 RMDs.  While helpful, beneficiaries still had to withdraw the entire account balance by the end of their original 10-year period, compressing the distributions schedule across the remaining years.

Fast forward to July of 2023 and the IRS released another notice, which provided another year of relief for Non-Eligible Designated Beneficiaries for decedents that passed away AFTER their Required Beginning Date.  Effectively, this class of beneficiaries are NOT required to take any distributions from their Inherited IRAs in 2023, kicking the can further down the road.  This relief further compresses the 10-year distribution schedule and may not be in the best interest of all clients.  Beneficiaries of inherited IRAs can take voluntary distributions at any time, and you should consult with your advisor to better understand your options for your specific tax situation.

The July IRS notice also provides RMD relief for any retirement account owner turning 72 in 2023 (anyone born in 1951).  When the SECURE Act 2.0 was enacted in late-December 2022, the RMD age was pushed back again from age 72 to age 73 (and ultimately age 75 in year 2033).  This last-minute change caused some confusion for those turning 72 in 2023, so the IRS is excusing 2023 RMDs for anyone turning 72 this year.  Because the most recent IRS notice came out mid-year, the IRS is also allowing these individuals to treat any year-to-date distributions as a rollover and the account owner can return these amounts back to their retirement account.  This is effectively an extension of the 60-day rollover rules and gives account owners until September 30th to return any unwanted year-to-date distributions.

As with many financial planning decisions, it’s important to understand your unique tax situation.  If you have an Inherited IRA or if you’re turning 72 in 2023, please reach out to your Rockbridge advisor to best understand your options.

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