The IRS and the Treasury Department have recently announced their plans to provide transition relief in response to changes in the required minimum distributions (RMDs) from retirement accounts. This move comes as a result of the SECURE 2.0 Act, which was enacted in late December 2022. Unfortunately, the late passage of the SECURE 2.0 legislation gave many plan administrators less than a month to update their payment systems to reflect the new changes for 2023.
Relevant changes under the SECURE 2.0 Act
The SECURE 2.0 Act significantly changed retirement planning, including adjusting the age for RMDs. Per the new changes, the required beginning date for RMDs shifted from April 1 of the year following when someone turns 72 to April 1 of the year after the calendar year in which an individual reaches either 73 or 75, contingent on their birthdate.
The adjustments in the required beginning date for these distributions have created a level of uncertainty among plan administrators and participants, leading to the IRS’s decision to issue this transition relief. Some of these issues involve deadlines, which may require action during 2023. Although the IRS has stated that it intends to issue final regulations at a later date, those rules will not apply until the 2024 calendar year.
Mischaracterization of RMDs
The late enactment of the SECURE 2.0 Act made it difficult for many plan administrators to update their systems in time to reflect the changes that began on January 1, 2023. As a result, some individuals who would have been required to take an RMD in 2023 based on their age received distributions that were erroneously tagged as RMDs. In turn, this mischaracterization effectively made the distributions ineligible for rollover.
In response to this issue, the IRS provided a notice assuring plan administrators and participants that certain distributions made during 2023, which would have been considered RMDs under the old criteria but are not RMDs under the SECURE 2.0 Act, will not result in any penalties and the deadline for rolling over these distributions has been extended.
Specially, the relief touches on:
Single-sum distributions made between January 1 and July 31, 2023, to participants born in 1951 or their surviving spouses. These distributions would have counted as RMDs before the SECURE 2.0 Act’s changes.
An extended deadline for IRA owners and surviving spouses to roll over those mischaracterized RMDs. Applicable recipients of these RMDs have until September 30, 2023, to rollover the RMD.
Plan administrators have also been granted relief for failing to properly characterize distributions made during the same period.
Relief for non-spousal beneficiaries
The IRS is also extending relief to non-spousal beneficiaries of inherited IRAs, where the IRA owner had been subject to RMDs during their lifetime.
In a nutshell, there is a rule addressing what must be done if the owner of a retirement account passes away on or after the date they’re required to start taking RMDs. Their non-spouse beneficiaries usually have a 10-year window to empty the account. However, the beneficiaries must withdraw distributions based on their expected lifespan for the first 9 of those 10 years.
Typically, if beneficiaries don’t withdraw the correct amounts each year, there are financial penalties. However, the IRS is offering relief for certain beneficiaries who missed these required distributions in 2023.
Specifically, the beneficiary of an inherited IRA will not be penalized if:
The original owner passed away after starting their RMDs in 2020, 2021, or 2022.
The beneficiary has not yet started taking out regular life expectancy payments.
The SECURE 2.0 Act also reduced the penalties for failing to take RMDs. As of 2023, the penalty for failing to take an RMD was lowered from 50% to 25% of the amount of the RMD that was not distributed. If the individual rectifies the missed distribution, submits a correct tax return, and pays any tax within two years after the year of the missed RMD, the penalty can be further reduced to 10%.
In addition to changes in RMDs, the SECURE 2.0 Act also authorizes employer matching contributions to be made to Roth accounts and allows individuals over age 70 ½ to make a one-time $50,000 (adjusted for inflation) qualified charitable distribution (QCD) to a charitable remainder trust or a charitable gift annuity.
The recent transition relief provided by the IRS and Treasury Department in response to changes in RMDs is a welcome development for plan administrators and participants. If you have any questions or would like to discuss these changes further, please contact our office to speak with one of our expert advisors.