The IRS issued Notice 2023-54 that addressed some lingering questions around recent changes to rules around Required Minimum Distributions from retirement plans.  In particular, the IRS has again chosen to delay action on requiring minimum distributions from some inherited retirement accounts until at least 2024.  They are also providing relief for taxpayers turning age 72 this year who mistakenly thought they were subject to RMDs.

Latest Developments on Inherited Retirement Accounts

Similar to their announcement last fall, the IRS has delayed the implementation of proposed regulations regarding the original SECURE Act enacted in December 2019.  These regulations will now be effective no earlier than 2024 (but possibly later).

Among the rules in the proposed regulations is a requirement that some beneficiaries subject to the new 10-year rule must also take minimum distributions each of the first 9 years after the owner’s death.  This would include cases where the decedent died after their own required beginning date for RMDs on the account.  As they did last year for 2021 and 2022, the IRS has said they will not penalize these beneficiaries who do not take an RMD for 2023.

Beneficiaries of inherited retirement accounts should keep the following points in mind:

• This waiver only applies to this one group of beneficiaries.  Eligible Designated Beneficiaries (EDBs) who are exempt from the 10-year rule are still subject to penalty for a missed RMD. EDBs include a spouse or minor child of the deceased owner, disabled beneficiaries, and others.
  
  
• Also, beneficiaries of an owner who died prior to their own RBD are not subject to this proposed RMD requirement, even though they may still be subject to the 10-year rule.
  
  
• This also does not impact a beneficiary who inherited any retirement account prior to 2020.  Those beneficiaries remain subject to the original stretch IRA rules and are unaffected by these recent changes.

Even without a requirement to take a withdrawal, beneficiaries on these accounts may want to begin withdrawals sooner than the 10th year to best manage their future tax liability.  This is especially true of beneficiaries of owners who died in 2020 and now are already in the third year of their 10-year window.

As was the case last year, the final resolution of this RMD issue remains to be seen, but possible outcomes include the following:

• A complete reversal by the IRS, meaning no RMD requirement for years 1-9 (while still enforcing the 10-year rule).
  
  
• A waiver of the RMDs for 2021 through 2023, but enforcement of the rules beginning in 2024.  In this scenario, beneficiaries would not have to “catch-up” on the earlier RMDs but would still have to empty the account by the end of the 10th year.
  
  
• A requirement to withdraw any missed RMDs for 2021 through 2023 during 2024 – essentially “catching-up” on prior year distributions – and then continue with RMDs up to the 10-year deadline.

Until the IRS provides final guidance on this issue, beneficiaries should be prepared to withdraw an RMD for 2024, based on the December 31, 2023 balance.

Relief From Inadvertant RMD Withdrawals

The other key announcement in this notice affects retirement account owners who turn age 72 in 2023.  Those individuals would have been subject to RMDs on those accounts this year, but the SECURE 2.0 Act changed the starting age for RMDs from 72 to 73 beginning in 2023.  However, because that change was enacted in late December 2022, some account owners may not have been aware and took withdrawals they otherwise would not have taken.  The IRS is allowing those account owners an opportunity to return those withdrawals back to their account, subject to the following limits:

• The withdrawal must be returned to the account no later than September 30, 2023.
  
  
• This only applies to retirement account owners born in 1951 (who would turn 72 this year) or their surviving spouse.
  
  
• This only applies to withdrawals taken from January 1, 2023 through July 31, 2023 that would have been RMDs had the rule not changed to age 73. Presumably, this means amounts withdrawn in excess of the expected RMD are not eligible for this relief.
  
  
• This rollover opportunity is available even if the account owner or surviving spouse had already completed a 60-day rollover during the prior 12 months.  However, this opportunity will preclude a second 60-day rollover over the following 12 months.
  
  
• Withdrawals after July 31, 2023 will be subject to the normal 60-day rollover rules, including the rule preventing multiple rollovers within a 12 month period.

Robert W. Baird & Co. Incorporated. Baird does not provide tax advice. Contact your tax professional.