IRS Delays RMD Rules for IRAs, 401(k)s…Again by Joanie B. Stein, CPA
Posted on September 25, 2023
by
Joanie Stein
In July 2023, IRS issued guidance granting taxpayers temporary relief from compliance with recently enacted laws concerning required minimum distributions (RMDs) from tax-deferred retirement accounts, including individual retirement accounts (IRAs) and 401(k)s.
Beginning Age for RMDs
In 2019, the president signed into law the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that, among other things, increased the age at which taxpayers must begin taking RMDs from 71½ to 72. However, the 2022 enactment of the SECURE Act 2.0 raised the age again to 73 for tax years beginning Jan. 1, 2023. Therefore, taxpayers who reach age 73 in 2023 can delay their first RMD until the date they stop working, unless they are a 5% owner of the business sponsoring the plan, or by April 1 of the calendar year after they reach age 73. For all subsequent years, RMDs must be taken by December 31. While plan participants can delay RMDs until they physically stop working, failure to take an RMD beginning in 2023 results in a penalty of 25 percent of the undistributed amount. If taxpayers correct a failure within two years, the penalty decreases to 10 percent.
The change in RMD age could be especially challenging for taxpayers born in 1951 who turned 72 and received their first distributions in 2023. Generally, the tax code grants retirement savers a 60-day window to roll over IRA and 401(k) distributions into other retirement plans to delay or avoid taxes on those withdrawals. However, this is not the case for RMDs. Moreover, the 60-day rollover window has closed for those taxpayers who turned 72 and received their first RMDs in early 2023.
The IRS is offering relief to these taxpayers who turned 72 in 2023 and took retirement plan distribution between Jan. 1, 2023, and July 31, 2023, granting them until Sept. 30, 2023, to roll over those withdrawals into other retirement plans and avoid tax on those amounts.
Elimination of Stretch IRAs
Another provision of the original law that left a lot of room for misinterpretation was the requirement that certain non-spouse beneficiaries of inherited IRAs draw down those accounts and pay the related taxes within 10 years of an original owner’s death.
To clarify this 10-year payout rule, the IRS explained that non-spouse beneficiaries who inherit a decedent’s IRA after Jan. 1, 2020, must take annual RMDs from those accounts and treat them as taxable income to themselves in years one through nine after an original account holder’s death and remove any remaining balance from those accounts (and pay the related tax liabilities) by the end of year 10. Depending on the value of the IRA, named beneficiaries could risk falling into a higher tax bracket and becoming saddled with significantly high tax liabilities for which they would pay higher tax rates on ordinary income and certain capital gains.
However, due to ongoing confusion over these rules, the IRS delayed the start date for the third time. Now, IRS beneficiaries who inherit an IRA from a non-spouse decedent may delay their first RMDs from those inherited accounts until 2024. While this is welcome news for many beneficiaries, it also means that they will need to withdraw higher amounts during the remaining years of the 10-year withdrawal period, potentially putting them into an even higher tax bracket.
About the Author: Joanie B. Stein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she works with individuals and closely held businesses to implement sound strategies intended to preserve wealth and improve tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.
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