Since 2019, we’ve seen numerous changes to IRA rules with both the Secure Act and Secure Act 2.0. We’re going to focus on the required minimum distribution relief for IRAs. 

Secure 2.0 changed the required beginning date for IRA distributions to 73 for this year. There is a phase-in to age 75 by 2033. The required beginning date is defined as April 1 of the calendar year following the year in which an individual reaches the applicable age. Therefore, an IRA owner who was born in 1951 will have a beginning date of April 1, 2025, not 2024.

The delay in the required beginning date is generally a welcome change but has brought confusion to taxpayers nearing retirement. In response, the IRS recently issued Notice 2023-54. It extends the 60 day due date for rollovers of distributions that were mischaracterized as Required Minimum Distributions (RMDs) due to the change in the required beginning date from age 72 to 73. The deadline for rolling over distributions made between January 1, 2023, and July 31, 2023, is now September 30, 2023.

Inherited IRA Rules

Secure Act and Secure Act 2.0 have also made numerous changes to inherited IRAs. Prior to Secure Act, beneficiaries of inherited IRAs could “stretch” RMDs over their life expectancy. Secure Act changed the rules. Many beneficiaries are required to distribute the entire inherited IRA balance before the end of a 10 year period. This new rule applied to any plan participant that dies in 2020 or later regardless of whether they died before, after or during taking RMDs.

Certain eligible designated beneficiaries (EDBs) could still stretch payments over a longer time period. Eligible beneficiaries are defined as a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not reached the age of majority. Additionally, certain trusts named as an IRA beneficiary are considered EDBs.

Different distribution rules are available depending on what type of EDB you are:

Spouse Beneficiary

  • A deceased IRA owner’s surviving spouse who is the beneficiary of the decedent’s IRA can treat the IRA as his/her own IRA, or can choose to continue acting in the capacity of a beneficiary and distribute the assets using the single life expectancy rule or the 10-year rule.

Disabled or Chronically Ill

  • A disabled or chronically ill individual may elect either single life expectancy or the 10-year rule.

Individual Not More Than 10 Years Younger Than IRA Owner

  • A non-spouse beneficiary who is not more than 10 years younger than the IRA owner may elect the single life expectancy option or the 10-year rule.

IRA Owner’s Minor Child

  • A child of an IRA owner who has not reached the age of majority may initially take death distributions using the single life expectancy rule. However, upon attaining the age of majority, he/she will be subject to a 10-year payout period.

The 10 Year Rule

Prior to the release of proposed Treasury regulations, we were unsure how the 10-year rule worked. Many tax professionals assumed distributions would be able to be made at the end of the 10 year period and would satisfy the new guidelines. In February 2022, the IRS released proposed rules with the following guidance:

  1. Designated beneficiaries who inherit an IRA or defined contribution plan before the deceased’s required beginning date can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includes the 10-year anniversary of the death.
  2. However, if the deceased dies on or after the required beginning date, designated beneficiaries would be required to take taxable annual RMDs (based on their life expectancies) in years one through nine, receiving the remaining balance in year 10. They can’t wait until the end of 10 years and take the entire account as a lump-sum distribution.

The trouble here, of course, is that the IRS waited to release these regulations… Until two years after original Secure Act rules were to be in place. Knowing this would create additional confusion, the IRS indicated that they would waive enforcement of the proposed rules for missed 2021 and 2022 RMDs. The most recent Notice 2023-54 once again extends this relief for another year to cover 2023 distributions.

It’s important to note that these are just proposed guidelines for now. However, I would expect final rules to be substantially similar. The IRS has indicated final regulations will apply for calendar years no sooner than 2024. I would expect to see more on this before the end of the year. I suspect we won’t see any more waivers on RMDs. So it’s important to have a game plan for distributions in 2024 and beyond to avoid additional IRS penalties.

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