Advisors are “getting hammered” with one big year-end tax question from clients now, according to IRA and tax expert Ed Slott: Do I have to take a required minimum distribution for 2023?
While it “sounds simple,” Slott of Ed Slott & Co. relayed, RMDs “are confounding advisors this year like never before.”
That’s the “most important year-end tax advice advisors can help their clients with,” Slott told ThinkAdvisor in a recent email exchange. Advisors “need to have this info down pat when clients call.”
Slott detailed for ThinkAdvisor in a question-and-answer format the layers of RMD rule changes that advisors are sifting through, stemming from the original Setting Every Community Up for Retirement Enhancement (Secure) Act, the IRS’ proposed regulations on the Secure Act, and changes under Secure 2.0. “Keep this guide on your desk!” Slott advised.
This exchange has been edited for clarity.
THINKADVISOR: What’s different this year in terms of taking RMDs?
ED SLOTT: The RMD rules have gone through several recent changes for IRA owners, company plan participants and beneficiaries. This stems from layers of RMD rule changes from the original Secure Act, the IRS proposed regulations on the Secure Act (which threw lots of people for a loop), and then Secure 2.0.
In addition, the RMD rules became so baffling that the IRS had to release several notices providing RMD relief, but that relief inadvertently added to the confusion since the relief applied to some groups but not others.
These issues combined have added more difficulty than ever before to determining which clients will be subject to RMDs this year. RMDs affect every client with a retirement account. Even if clients are not yet subject to RMDs, they may want to make plans now to minimize taxes on future RMDs for themselves and their beneficiaries.
Advisors are already receiving questions on this as the year winds down, and many advisors are not sure what to answer. Plus, there’s lots of misinformation out there.
Why is missing an RMD a big deal?
Because missing an RMD, or not taking the right amount, can subject both IRA owners and beneficiaries to RMD penalties, and those rules have changed as well beginning this year.
Secure 2.0 lowered the longtime draconian 50% RMD penalty to 25% and even to 10% if the missed RMD is timely made up (generally within two years).
The penalty can still be waived entirely by filing IRS Form 5329 and requesting the waiver for good cause — like outright confusion over these rules! But no advisor or accountant wants to go this route. They’d rather get it right the first time and avoid the extra filings and correspondence, which only reminds clients that there was a problem — and that’s not good.
Who’s subject to RMDs this year?