On July 14, 2023, the Internal Revenue Service (“IRS”) released an advance copy of Notice 2023-54 (the “Notice”) that provides relief to plan administrators, payors, plan participants, IRA owners, and beneficiaries in connection with the change in required beginning date for required minimum distributions (“RMDs”) under §401(a)(9) of the Internal Revenue Code (“Code”) regarding RMDs for 2023. The Notice warns that final Regulations relating to RMDs yet to be issued will apply beginning on January 1, 2024. To better understand the impact of the Notice, let’s review some of the basics of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, the associated Treasury Regulations, and SECURE Act 2.0 (“the Act”).
SECURE changed the landscape of retirement planning by increasing the age at which a taxpayer could contribute to their Individual Retirement Account (“IRA”), creating a new class of beneficiary called the “Eligible Designated Beneficiary” (“EDB”), and eliminating the lifetime stretch for any beneficiary who is not an EDB and instead implementing the 10-year rule. For those needing a quick refresher, EDBs consist of surviving spouses, children who have not yet reached the age of majority, chronically ill or disabled individuals, and any other individual not more than ten years younger than the participant, or appropriately structured trusts for the benefit of those individuals. EDBs are the only beneficiaries exempt from the 10-year rule, which operated like the 5-year rule from pre-SECURE Act. Thus, under the 10-year rule, a non-EDB need not worry about RMDs and only needed to withdraw all funds by December 31st of the year of the tenth anniversary of the participant’s death.
In February 2022, the United States Treasury released much-anticipated proposed regulations updating, among other things, the rules regarding RMDs from IRAs. The proposed regulations backtracked on some of the published guidance by adding the requirement of lifetime distributions to any non-EDB in years 1-9 after the participant’s death if the participant died after his or her Required Beginning Date (“RBD”). Now, any non-EDB needs to take annual distributions based upon the beneficiary’s life expectancy over the nine years following the participant’s death and exhaust the IRA by December 31st of the year of the tenth anniversary of the participant’s death if the participant reached their RBD prior to death. Thankfully, the Internal Revenue Service realized that this represented a sharp departure from the advice that many advisors were giving their clients and promulgated Notice 2022-53 that confirmed waiver of any excise taxes resulting from failure to take RMDs in either 2021 or 2022.
SECURE 2.0 passed at the end of 2022 and built on the foundation of SECURE by extending, clarifying, and expanding provisions of the original SECURE Act. Notably, the Act increased the age at which the participant needs to begin taking RMDs to 73 beginning in 2023 and lasting until 2032, at which time the age increases to 75. SECURE also tied the RBD to April 1st in the year after the participant reached the applicable age rather than age 72 specifically to accommodate this change. However, this change caused a bit of confusion because anyone reaching age 72 in 2022 would have had to begin taking RMDs in 2023 prior to the Act but given that the Act passed late in 2022, many failed to realize that they had no RMD due in 2023 and took those distributions and many plan administrators mischaracterized them as RMDs. This mischaracterization made the distributions ineligible for the 60-day to roll over to another plan or IRA.
The Notice fixes this issue by recharacterizing distributions from IRAs taken in 2023 and allowing individuals born in 1951 (or that participant’s surviving spouse) who took distributions between January 1, 2023, and July 31, 2023, to roll them over by extending the 60-day roll over deadline to September 30, 2023. Thus, if you received a lump sum distribution in January 2023, part of which was treated as ineligible for the roll over because it was characterized as an RMD, you now have until September 30, 2023, to roll over the mischaracterized part of the distribution. This same rule applies for certain IRA distributions made to an owner (or their surviving spouse) made between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or their surviving spouse) that would have been an RMD but for the change in RBD under the Act. The roll over is permitted even if the participant or spouse already rolled over a distribution in the last twelve months but will preclude any roll over in the next twelve months.
As should be clear, this article applies to a specific subset of people – only those born in 1951 who received a distribution in 2023. If you would like to read the Notice in its entirety, here’s a link: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-drop/n-23-54.pdf. This Notice provides a great opportunity to connect with clients and advisors to see if they want to take advantage of the extended roll over period.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128