Some May Have Received Incorrect RMD Notices in Early 2023

The IRS recently released IRS Notice 2023-23 to provide relief to financial institutions who may have sent incorrect required minimum distribution (RMD) notices to traditional IRA owners becoming age 72 during 2023.

The incorrect RMD notices stated that the traditional IRA owners have to take their first traditional RMD for 2023, when in fact they do not have to.

To understand how the problem happened, it is important to discuss a major change affecting traditional IRAs resulting from SECURE Act 2.0, passed into law by Congress in late December 2022.

This change increases the traditional IRA RMD age from age 72 to age 73. Note that SECURE Act 1.0 (passed into law in late December 2019) raised the traditional IRA RMD age from 70.5 to 72 for traditional IRA owners born after June 30, 1949.  The SECURE Act 2.0 raised the RMD age to age 73 for traditional IRA owners born between January 1, 1951 and December 31, 1959.

A problem for some financial institutions (such as banks, credit unions and brokerages) who are traditional IRA custodians was that because SECURE Act 2.0 was enacted late in 2022 (December 29, 2022), many financial institutions did not have time to update their systems before sending out incorrect RMD notices in early 2023.

With regard to sending out RMD notices, the IRS requires financial institutions who are traditional IRA custodians to send a statement to traditional IRA owners who are subject to RMDs in a particular year.

For first-time traditional IRA RMD owners, the notice must inform the traditional IRA owner of the due date for their first traditional IRA RMD and the RMD amount.

Note both federal employees and federal retirees are subject to the traditional IRA RMD rules. The traditional IRA RMD rules apply to working and retired individuals who reach their “required beginning date” (RBD), the date they must take their first RMD.

Given the late enactment of SECURE 2.0, some traditional IRA custodians may have sent notices to traditional IRA owners becoming age 72 during 2023 when in fact these individuals do not have to their first RMD during 2023.

This is because these traditional IRA owners were born after December 31, 1950 (born during 1951). These individuals will not have to take their first traditional IRA RMD until 2024 (the year they become age 73) and they will not have to take their traditional IRA RMD for 2024 until April 1, 2025, which is their traditional IRA RBD.

The IRS notice provides relief to financial institutions who sent out incorrect RMD notices provided that they notify affected traditional IRA owners by April 28, 2023. These institutions will have to correct any Form 5498 (IRA Contribution Information) in which a box is checked indicating a 2023 RMD is due.

What happens in the case of a traditional IRA owner born during 1951 who was “proactive” in early 2023 and took hos or her first RMD? The traditional IRA owner took an unnecessary traditional IRA RMD for 2023.

The question is:  Can the unnecessary distribution be rolled back over?

IRS rules prohibit a traditional IRA RMD from being rolled over to a traditional IRA or converted to a Roth IRA.

However, in this case the RMD was in fact a regular distribution and not a traditional IRA RMD, it therefore may be rolled over to a traditional IRA or converted to a Roth IRA. Federal and state income taxes will be due on the Roth IRA conversion.

If the traditional IRA owner does not want to pay the income tax due on a Roth IRA conversion and instead rolls over the funds back to a traditional IRA, then the withdrawn funds must be eligible to be rolled over. The distribution is subject to both the IRS’ once per year IRA rollover rule and the 60-day rollover rule.

What is the IRS’ Once-Per-Year IRA Rollover Limit Rule?

Only one IRA-to-IRA rollover can be performed within a 365-day period (a “year”). A “year” is a 365-day period, not a calendar year. This means that any unnecessary traditional RMD performed earlier in 2023 cannot be rolled if another rollover was performed anytime within the previous 365 days.

A rollover includes either a traditional IRA-to-traditional IRA rollover or a Roth IRA-to-Roth IRA rollover. This rule applies even if a traditional IRA owner relied on incorrect information from his or her financial institution. If a rollover cannot be performed, then the unnecessary IRA RMD will be taxable for the year 2023.

What is the IRS’ 60-day Rollover Rule?

The IRS’ 60-day rule means that a rollover of a traditional IRA distribution cannot be performed if more than 60 days have passed since the date the IRA owner received the distribution.

Note that 60 days are calendar days, not business days. The 60-day rule violation would also prohibit a Roth IRA conversion because the traditional IRA distribution would have had to be converted within 60 days of the receipt of the traditional IRA distribution. The following example illustrates:

Example. Frank turned age 72 on January 22, 2023. He was born January 22, 1951. Frank owns several traditional IRAs whose total value as of December 31,2022 was $850,000. Not aware of the SECURE Act 2.0 passage, he decides to take his first traditional IRA RMD on January 30, 2023. He calculated the RMD to be $850,000/27.4 equals $31,022 and requests a distribution of that amount from his traditional IRA custodian which he received on January 31, 2023.

When Frank goes to his tax preparer on April 3, 2023 to get his 2022 income taxes prepared, he is told that the $31,022 traditional IRA RMD was not necessary because Frank’s RMD age increased to age 73. Frank asked his tax preparer whether he can convert the $31,022 distribution to a Roth IRA. The tax preparer said no because more than 60 days had passed since the day Frank received the traditional IRA distribution (January 31).

For many affected traditional IRA owners, the 60-day rule may not be as much of a problem as the once-per-year IRA rollover rule. This is because it is relatively early in 2023.

Those federal employees and retirees who mistakenly took their first traditional IRA RMD over the past one to two months (early March through late April – within the last 60 days) still have time to either roll the funds back to their traditional IRA or to convert the funds to a Roth IRA. This is assuming they have not performed any IRA rollover over the past 365 days.

SEE ALSO: Individual Retirement Arrangements (IRAs)