IRS Provides RMD Relief to 1951 Babies and Certain Beneficiaries of Inherited IRAs

On August 25, the IRS issued Notice 2023-54, “Transition Relief and Guidance Relating to Certain Required Minimum Distributions” providing relief to certain qualified retirement plan participants, Individual Retirement Account (IRAs) owners, and beneficiaries as a result of Secure Act 2.0 raising the Required Begin Date (RBD) for Required Minimum Distributions (RMDs) The Notice also offers much needed relief regarding IRS interpretation of the Secure Act 1.0 provision affecting post-death distribution according to the 10-year payout rule that applies to certain beneficiaries of defined contribution plans and IRAs.

Notice 2023-54 relief affects certain RMDs inadvertently paid at the beginning of 2023. More specifically, the Notice provided relief to a particular group of retirement account owners—those born in 1951.

Secure Act. 2.0 was signed into law on December 29, 2022. Of the roughly 90 provisions included in the massive bill, there is a change to the RBD for starting RMDs— individuals who turned age 72 in 2023 now have an RBD of April 1, 2025, as opposed to April 1, 2024, under prior law. The age for starting lifetime RMDs was raised from 72 (Secure Act 1.0 of 2019 increased the RMD age from age 70 ½ to 72, starting in 2020) to 73, effective for distributions required to be made after December 31, 2022, with respect to retirement account owner who will attain age 72 after that date. Due to this change, certain retirement account owners thought they were subject to an RMD for 2023 but were not, due to the age increase for starting RMDs. Therefore, an individual turning age 72 in 2023 would not have an RMD due for 2023.

Because the legislation was enacted at year-end (December 29), its’s likely some individuals (those individuals born in 1951) received distributions from their 401(k), 403(b) or IRA in 2023 processed as an RMD, even though it is not required for that year. In other words, such distributions were not RMDs, and the account owner therefore may not have needed or wanted the associated income or to be liable for the subsequent taxation.

Notice 2023-54 provides rollover relief to those account owners born in 1951, for distributions made from a qualified retirement plan or IRA between January 1, 2023, and July 31, 2023, that would have been an RMD but for the change made by Secure Act. 2.0. The Notice provides that the affected individual has until September 30, 2023, to roll the funds over. This serves as an extension of the normal 60-day rollover window.

Example: Sarah owns a traditional IRA and attained age 72 in 2023. Sarah, on January 4, 2023, took a distribution from her IRA, believing she needed to take an RMD for 2023. Sarah later realized, due to the change made by Secure Act 2.0, she is not required to take a 2023 minimum distribution. Per Notice 2023-54, Sarah has until September 30, 2023, to roll over this distribution (although she doesn’t have to).

Notably, if Sarah had already made another 60-day IRA rollover in the 12 months (365 days), that will not preclude her from rolling over the 2023 distribution. However, going forward, any distribution Sarah takes from any of her IRAs before January 4, 2024, will not be rollover eligible (due to the once-per-year IRA rollover rule).

Practice Tip. There is nothing preventing a retirement plan participant from rolling funds back into the distributing plan (i.e., 401(k) or 403(b)), particularly if the participant is a 5% owner (currently employed by the employer sponsoring the 401(k) plan). 

Previously, most non-spouse beneficiaries could “stretch” post-death RMDs from inherited IRAs over their single life expectancy. Unfortunately, the stretch strategy was curtailed upon the passing of Secure Act 1.0.

Secure 1.0 replaced the stretch with a 10-year payout rule for certain non-spouse beneficiaries for deaths occurring on or after January 1, 2020. Instead, the new rule requires affected beneficiaries to empty the inherited IRA no later than the end of the 10th year following the year the account owner died. What was thought to be straightforward rule was anything but. Enter the IRS.

The IRS, in February 2022, took the surprise position, via their proposed regulations, that when a retirement account owner dies on or after their RBD for RMDs (generally April 1 of the year after the year an IRA owner turns age 73), a non-Eligible Designated Beneficiary (NEDB) must take annual RMDs during years one through nine of the 10-year payout period. This interpretation took many financial professionals and retirement investors by surprise. Many had thought the 10-year rule would follow the application of the five-year rule, which does not require annual RMDs. In other words, there was a collective sigh that the IRS was now requiring annual minimum distributions during the 10-year period for those individuals who died on/after their RBD for RMDs. 

The rule requiring annual RMDs when a retirement account owner dies on or after their RBD is referred to as the “at least as rapidly” (ALAR) rule. Importantly, ALAR does not require the same (RMD) amount that was taken by the IRA owner to also be taken by the beneficiary; however, it does require that the practice of taking minimum annual distributions continues. In other words, annual RMDs must continue after death of the account owner (although the amount of the RMD does not have to be the same).

The IRS position meant that NEDBs of retirement account owners, who died in 2020, 2021, or 2022 on or after their RBD, should have taken their first required distribution in the following year (of the account owner’s year-one of the 10-year period) — even though most professionals thought a distribution was not required. 

The IRS, to its credit, realized there was a lot of confusion. In October 2022, the agency issued Notice 2022-53 providing RMD relief for NEDBs who missed 2021 and 2022 RMDs for those  account owners who died on or after their RBD date. Notice 2023-54 extends that RMD relief for an additional year.

Notice 2023-54   excuses 2023 RMDs for NEDBs of retirement account owners who died in 2022 after their RBD. In summary, the IRS guidance allow for the following:

• For an NEDB who inherited an IRA in 2020 (from an owner who died on/after their RBD), the first three years of RMDs (2021, 2022, and 2023) have been waived.
• For an NEDB who inherited an IRA in 2021 (from an owner who died on/after their RBD), the first two years of RMDs (2022 & 2023) are waived.
• For an NEDB who inherited an IRA in 2022 (from an owner who died on/after their RBD), the 2023 RMD has been waived.

Notably, Notice 2023-54 and prior guidance does not waive all RMDs for 2021, 2022, or 2023. For example, it doesn’t waive lifetime RMDs (IRAs or qualified retirement plan), designated beneficiaries who inherited an IRA before 2020 or Eligible Designated Beneficiaries “stretching” post-death distributions.

Example: Janine, age 80, owner of a traditional IRA, dies on January 2, 2020. Jeff, her son, age 42, is her beneficiary. Jeff is a NEDB and is subject to the 10-year rule. Furthermore, since Janine died after her RBD, Jeff must take annual RMDs based on his single life expectancy during years one through nine of the 10-year period.

Under Notice 2022-53, if Jeff did not take RMDs for 2021 and 2022, the IRS will not assess a penalty for him failing to take an RMD. Notice 2023-54 extends this same relief to the 2023 RMD.

Unfortunately, IRS relief doesn’t allow Jeff to “roll-back” the distributed funds. So, if Jeff took a distribution for 2023, thinking it was required, he cannot roll over those funds (even if it’s within the 60-day window).

Practice Tip! The IRS proposed regulations state a beneficiary who inherits a Roth IRA is deemed to have inherited from an owner who died before her RBD, regardless of age of the account owner (now deceased). This is because Roth IRA owners are not subject to lifetime RMDs (Therefore, Roth IRAs do not have an RBD for lifetime RMDs). While most beneficiaries of Roth IRAs are subject to the 10-year payout rule, annual RMDs are not required—thus allowing the inherited funds to remain tax deferred (for up to a decade) and subsequently distributed to the beneficiary tax free!

Example: Anthony, age 95, owner of a traditional IRA, dies on February 2, 2018. Ray, his son, age 55, is the named beneficiary. Since Anthony died pre-Secure Act 1.0, Ray can “stretch” distributions based on his single life expectancy.

Ray suddenly dies in January 2020. The successor beneficiary (beneficiary of a beneficiary) is Ray’s son, Connor. Here Connor is subject to the 10-year rule brought on by the Secure Act 1.0. Connor must also take RMDs based on Ray’s single life expectancy during years one through nine of the 10-year period. IRS Notice 2022-53 and 2023-54 provide relief to Connor for failure to take his 2021, 2023, or 2023 RMD.

Example: Isabelle, age 75, owns a traditional IRA. Isabelle is subject to a 2023 RMD as she has passed her RBD for RMDs. If she does not take her required distribution, she may be subject to a 25% excise tax. IRS guidance does not offer relief from the penalty for failing to take a lifetime RMD.

Example: Tina, age 77, who owned a traditional IRA, died March 1, 2020. Her beneficiary is her sister Amy, age 73. Amy is an EDB because she is not more than 10 years younger than Tina. Amy, as an EDB, can “stretch” RMDs over her single life expectancy. If she fails to do so, IRS relief via Notice 2023-54 does not give her RMD relief.

Example: Ken inherited a SEP IRA from his father in 2017. Ken has been taking RMDs each year based on his single life expectancy. Ken can stretch payments because he inherited prior to  SECURE Act 1.0, However, if he fails to take a 2023 RMD (from the inherited SEP IRA), IRS relief, via Notice 2023- 54, does not give him RMD relief.

As always, we suggest speaking with a financial or tax professional should you need assistance navigating IRS guidance.

Advisors:  If you have additional questions about this or other retirement-related topics, please contact your Lord Abbett representative at 888-522-2388.