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RMDs

Retirement Planning > Spending in Retirement > Required Minimum Distributions

2023 RMD Rule Changes: 3 Common Client Questions

By Roger Wohlner

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What You Need to Know

  • RMDs for clients turning 72 in 2023 are not required until 2024, regardless of whether they received a notification to the contrary.
  • The IRS has extended the 60-day rollover period for these unneeded RMDs to Sept. 30.
  • The IRS has waived the RMD requirement for beneficiaries of inherited IRAs subject to the 10-year rule.

There has been a lot of confusion in 2023 surrounding required minimum distributions (RMDs). This has largely been fueled by changes from the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act, which was passed in late 2022.

In addition, the original Secure Act changed the RMD rules for inherited IRAs in ways that the IRS has not yet definitively interpreted.

Your clients who may be affected by these situations need your help and guidance in dealing with them. Here are three common questions you can expect from clients, as well as other major issues surrounding RMDs where confusion may reign.

Do I Need to Take My RMD This Year?

Secure 2.0 raised the age at which RMDs must start to 73 from 72, starting in 2023. The law was enacted so late in the year — December 29, 2022 — that there was a great deal of confusion regarding the required beginning date for RMDs for those reaching age 72 in 2023.

Many folks who were turning 72 in 2023 thought they still needed to commence RMDs in 2023. A main source of this confusion was the fact that many plan sponsors and IRA custodians had already mailed out RMD notices to those turning 72 this year due to the late enactment of the new rules.

In March, the IRS set a deadline of April 28 for IRA custodians to notify account holders who will turn 72 in 2023 that they do not have to commence taking their RMDs this year.

If any of your clients were affected by this situation, they will need your guidance in deciding what to do if they have taken an unnecessary RMD.

Keep in mind that clients who turned 72 in 2022 are required to continue taking their RMDs. The same applies to any clients who were taking RMDs prior to 2023. Nothing has changed for them in terms of their RMD requirements.

I Turned 72 in 2023. Can I Return My RMD?

The IRS recently released Notice 2023-54 extending the 60-day rollover period for IRAs and extending the time that those who took RMDs from IRAs or other retirement accounts have to return that money to their accounts or reclassify the distribution as a rollover until Sept. 30.

In many cases, your clients may be able to put the money back in their IRA or into a 401(k) or other type of retirement plan account from where the RMD originated. Especially in the case of an employer plan, if they can’t redeposit the erroneous RMD, their next best option may be to treat the money like a rollover and deposit it into an IRA by the Sept. 30 deadline.

One thing for clients to keep in mind is that if their RMD taken in error included the withholding of taxes, they must include the amounts withheld for taxes when putting the money back into their account. Otherwise, that money will be treated as a taxable distribution.

Should I Return RMDs Taken by Mistake?

Whether or not your client should return some of all of this money is a planning issue to work with your client on. There are a number of factors to consider.

  • How large was the distribution?
  • Does your client need the money?
  • What is their tax situation? How will the extra taxes from the premature RMD affect them tax-wise this year?

The income from this unneeded RMD could push them into a higher level of Social Security taxation and may trigger a Medicare IRMAA surcharge two years from now.

On the other hand, if your clients finds themselves in a lower-than-normal tax bracket this year, perhaps they might keep some or all of the distribution, reducing RMDs in future years.

If they are in a higher tax bracket and able to itemize, they might use some or all of this money to make charitable contributions. Depending upon the size of the distribution, this could offer the chance to make significant contributions to one or more organizations. They might use this money to bundle several years’ contributions into 2023 to allow them to itemize where they may otherwise not be in a position to do so. This could offset some or all of the tax hit from the unneeded RMD.

The best course of action for any non-required distributions will vary by client, and this should be considered as part of the planning you do for them this year.

Inherited IRAs and RMDs in 2023

Another part of the recently issued IRS guidance on RMDs dealt with the 10-year rule surrounding beneficiaries of inherited IRAs, specifically whether or not they needed to take an RMD in 2023.

The original Secure Act eliminated the ability for many inherited IRA beneficiaries to stretch their inherited IRA distributions. Those who inherited IRAs on or after Jan. 1, 2020, must withdraw funds over a 10-year period. There are some exceptions for certain qualified beneficiaries such as a surviving spouse.

Whether these beneficiaries would need to take RMDs over this 10-year period has been a major source of confusion. At first, the thought was no. However, the IRS then announced in proposed regulations that if the original account holder had died after their required beginning date to commence their own RMDs, then the beneficiaries would need to take RMDs on their inherited IRA in years one through nine.

The IRS has since indicated that there will be no penalties for RMDs not taken in 2021 or 2022 due to lack of guidance or other reasons. Their most recent announcement indicated that there will be no RMD requirement for 2023, either.

The requirement to fully distribute the inherited IRA account over the 10-year time period is still in place, however. We don’t know exactly if or when the RMD requirement will be implemented and enforced.

This means that you need to work with your client to decide on a schedule for taking their distributions from their inherited IRA over the 10-year period, especially if the inherited IRA is a traditional IRA or a Roth in which the original account owner did not meet the five-year rule prior to their death.

This planning should take into account your client’s tax situation. Waiting until year 10 to take the full distribution could result in a significant tax bill if the account balance is large, and/or if your client finds themselves in a high tax bracket. It may make sense to take distributions in any years in which your client’s income is lower than normal, or at least to spread them out over the 10-year period to avoid a significant tax hit in year 10.

Other Secure 2.0 Act RMD Changes

The Secure 2.0 Act included some other RMD rule changes that you and your clients need to be aware of.

Reduced Penalties for Missed RMDs

The Secure 2.0 Act reduced the penalty for a missed RMD from 50% of the amount not taken to 25% of that amount beginning in 2023. If the error is corrected quickly in the eyes of the IRS, the penalty may be reduced to 10%.

In some cases, if your client can demonstrate that the missed RMD was due to a situation beyond their control, such as an illness, they may be able to have the penalty waived. The exact circumstances where this forgiveness might be granted have not been clearly defined.

As IRA expert Ed Slott explained to ThinkAdvisor in May:

For most people, correction must be made by the end of the second tax year following the year for which the RMD was missed. The RMD would need to be taken and the 10% penalty paid during this window.

But the penalty can also be waived altogether by filing IRS Form 5329. The missed RMD must still be made up and you must provide a reason for the missed RMD, like medical issues, death in the family, confusion on the rules or incorrect advice.

No Roth 401(k) RMDs Starting in 2024

Beginning in 2024, there will be no RMDs for designated Roth accounts in a 401(k) plan. This will put these accounts on par with Roth IRAs when it comes to RMDs. While these withdrawals were not taxable if certain requirements were met, those with money in a Roth 401(k) were still forced to take a withdrawal or to roll these accounts over to a Roth IRA in order to preserve the tax-free nature of these funds.

Summary

For many of your clients, 2023 is a year of potential confusion over the status of RMDs from various accounts. These clients need your help to stay on track for this year and to plan for the years ahead.

Roger Wohlner

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