Required minimum distribution, or RMD, rules continue to evolve.
The "final" RMD regulations that practitioners have been waiting for since the passage of the SECURE Act in December 2019 are still in the works.
While we don't know the exact timing, we do know that final regulations will apply for "determining RMDs for calendar years beginning no earlier than 2024," quoting the IRS's July 14 Notice (2023-54, Transition Relief and Guidance Relating to Certain Required Minimum Distributions -- tinyurl.com/r59fv35c).
Let's review how we got here -- and talk about the new relief the IRS is providing to those affected by the wait. As a word of caution, RMD rules are complicated and evolving, plus each taxpayer's situation is unique -- be sure to talk with your tax adviser before taking any actions.
One of the provisions of the SECURE Act that continues to be discussed involves inheriting a traditional, tax-deferred IRA.
The SECURE Act established a new 10-year limit for distributions for most beneficiaries (as opposed to a potentially much longer inheritor's life expectancy).
In February 2022, the IRS issued proposed regulations for the SECURE Act (tinyurl.com/3j6vb45t) -- these are the regs that are still to be finalized.
One of the proposed regs provided that a designated beneficiary who in 2020 or later inherited an IRA for which the original owner HAD been taking RMDs was required to CONTINUE taking RMDs for the next nine years, then empty the account in the 10th calendar year after the death of the original owner.
Excluded from the designated beneficiary requirement was a new type of beneficiary created by the SECURE Act: "eligible designated beneficiary," defined in IRS Publication 590-B (tinyurl.com/yc6tx8dh) as:
-- The IRA owner's surviving spouse
-- The IRA owner's minor child
-- A disabled or chronically ill individual
-- Any other individual who is not more than 10 years younger than the IRA owner
Prior to the proposed regulations, many had interpreted the SECURE Act to require emptying the inherited IRA at the end of the 10-year period, without the need for annual withdrawals, irrespective of whether the original owner had been taking RMDs.
The IRS acknowledged the disconnect in October 2022 in Notice 2022-53 (tinyurl.com/5y924pne). The IRS noted that beneficiaries of IRA owners who died in 2020 reported that they had not taken RMDs in 2021 and were unsure of whether they would be required to take RMDs in 2022. Keep in mind that penalties (excise taxes) are due for failure to timely take RMDs.
The IRS came through for those affected in Notice 2022-53 by waiving penalties for beneficiaries of IRA owners who died in 2020 for 2021 and 2022 RMDs -- as well as 2022 RMDs for beneficiaries of owners who died in 2021.
At the time, the penalty (excise tax) was 50% of the RMD that was not taken by the required due date. Now, as a result of SECURE Act 2.0, which became law at the end of 2022, the excise tax has been reduced to 25%, or "possibly 10% if the RMD is timely corrected within two years," according to the IRS (tinyurl.com/ykjb3zbu).
Then, in July's Notice 2023-54, the IRS extended penalty waivers for 2023 RMDs for beneficiaries of IRA owners who "died in 2020, 2021, or 2022."
You might wonder if penalty waivers also waive the need to actually take money out of the inherited IRA as an RMD.
When asked, an IRS spokesperson commented that "the intention was to provide relief for 2023, so effectively, there is no RMD due for 2023 for those beneficiaries described in the notice." The spokesperson added that the same is true for RMDs in 2021 and 2022 for those beneficiaries described in Notice 2022-53.
Meanwhile, the wait for final RMD regulations continues.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION