RMDs: Everything Advisors Need to Tell Clients Now

“Participants in employer-sponsored retirement plans can delay taking their RMDs until they retire, unless they are a 5% owner of the business sponsoring the plan,” according to the IRS notice.

Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2023.

Beginning in 2024, “designated Roth accounts will not be subject to the RMD rules while the account owner is still alive,” the IRS explains.

Missed RMD Penalties

“If an account owner fails to withdraw the full amount of the RMD by the due date, the owner is subject to an excise tax equal to 25% of the amount not withdrawn for 2023 and later years,” the IRS states.

The Secure 2.0 Act “dropped the excise tax rate from 50% for distributions required for 2023 and reduces the tax rate to 10% if the error is corrected within two years,” according to the agency.

The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD was required but not taken, the agency explained.

Inherited IRAs

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner.

As the IRS explains, the factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include:

• Whether the account owner died after 2019 (the Secure Act made changes to the RMDs for beneficiaries if the death of the account holder occurred after 2019).
• The relationship of the beneficiary to the account owner and certain characteristics of the beneficiary (spouse, minor child, disabled or chronically ill individual, entity other than an individual).
• Whether the original account owner passed away before or after their required beginning date (the date the original account owner was required to begin taking RMDs).

IRS Notice 2023-54 provides that certain non-spouse beneficiaries subject to the 10-year distribution rule will not fail the RMD requirements because they didn’t make distributions in 2023, according to the IRS.