Transitional Relief for RMDs & Inherited IRAs

By Gabriel Salazar, PP&Co Sr. Tax Associate

 

Required Minimum Distributions (RMDs)

The Internal Revenue Service (IRS) has released new guidance which provides relief to taxpayers concerned with having to begin taking Required Minimum Distributions (RMDs) from their retirement accounts as a result of the SECURE 2.0. Act. Specifically, the applicable age triggering the required beginning date (RBD) for traditional IRAs and other qualified plans was raised from 72 to 73. For reference, the RBD is defined as April 1 of the calendar year following the year in which an individual reaches the applicable age. Therefore, an IRA owner born in 1951 will have a required beginning date (RBD) of April 1, 2025, rather than April 1, 2024. The change has caused some confusion for taxpayers and plan administrators, as retirees may have initiated distributions in 2023 given that they were under the impression RMDs were required by April 1, 2024. These distributions may have been incorrectly categorized as RMDs.

The IRS addressed these concerns as follows:

• Taxpayers with distributions between January 1, 2023 and July 31, 2023 that may have been mischaracterized as RMDs now have until September 30, 2023 to roll over the distribution into a retirement account.
  • If the taxpayer does not roll over the distribution by the deadline of September 30, 2023 the distribution will be considered taxable income.
• The rollover extension also applies to mischaracterized IRA distributions that were made to an IRA owner (or surviving spouse).

Inherited Individual Retirement Accounts (IRAs)

The IRS also provided updated guidance regarding Inherited IRAs. The SECURE Act (issued in 2019) eliminated the rules permitting heirs to IRAs from stretching/delaying the RMDs on the accounts over their entire life expectancies. Prior to the SECURE Act, younger heirs were allowed to take smaller distributions and defer taxes while the accounts grew. The SECURE Act generally requires that, for IRA owners or defined contribution plan participants who were deceased in 2020 or later, the entire balance of the account must be distributed within 10 years of death. Proposed regulations in 2022 stated that a beneficiary who inherited an IRA can satisfy the 10-year rule by taking the money out or distributing before the end of the calendar year, which includes the 10-year anniversary of the death.

Notably, the proposed regulations indicate that if the deceased passed away after the start of their RMDs, the beneficiary would be required to also take taxable annual RMDs in years one through nine, receiving the remaining balance in year 10. The 10-year rule and the proposed regulations left many designated beneficiaries who recently inherited IRAs or defined contribution plans confused as to when to begin taking RMDs.

The IRS addressed these concerns as follows:

• The IRS has waived enforcement against taxpayers who were subject to the 10-year rule but did not take their RMDs in 2021 and 2022; the waiver applies if the taxpayer was deceased in 2020 or 2021 on or after the date RMDs were scheduled to begin.
• The latest guidance has extended the waived enforcement against taxpayers who missed 2023 RMDs if the participant died in 2020, 2021, or 2022 on or after the date RMDs were scheduled to begin.

The IRS also announced that final regulations related to RMDs will apply for calendar years no sooner than 2024 (not 2023 as previously stated). We will be monitoring the situation and provide updates and further guidance as it becomes available. In the meantime, please contact us at info@ppandco.com or (408) 287-7911 with questions or to determine the best course of action for your specific situation.