Limited Relief on 2023 RMDs from IRS – Part II

This is the second of two  columns discussing how the IRS in Notice 2023-54 provides limited relief to IRA owners and beneficiaries regarding required minimum distributions (RMDs).

The relief is related to the passage of SECURE Act 2.0 which was passed into law on December 30, 2022. The first MFR Column discussed relief to IRA owners born in 1951 who took their first IRA RMD in early 2023 when in fact they did not have to. This column discusses RMD relief for non-spousal beneficiaries of IRAs in which the IRA owner died after December 31, 2019.

Before discussing the RMD relief contained in IRS Notice 2023-54, it is important to review the RMD rule changes applicable to IRA beneficiaries.

Before the passage of SECURE Act 1.0 in December 2019, any non-spousal beneficiary of an IRA had to withdraw his or her inherited IRA during their inherited IRA (also known as a “death” IRA) during their lifetime. The inherited IRA beneficiary could not rollover the inherited IRA into their own IRA, nor could they make contributions to the inherited IRA. The beneficiary had to withdraw the IRA and pay federal and state income taxes.

But the beneficiary had the option of withdrawing the inherited IRA over their life expectancy, in which each year a minimum amount based on the IRA account balance at the end of the previous year and the beneficiary’s life expectancy would be withdrawn. In so doing, the beneficiary could spread the distribution over many years and also could spread out the federal and state liabilities due on withdrawals.

SECURE Act 1.0 resulted in significant changes to IRA beneficiaries. The changes took become effective for IRA owners who died after December 31, 2019. In particular, only “eligible designated beneficiaries” (EDBs) have the option of mandatory withdrawals from their inherited IRAs over their lifetime expectancy.

EDBs include the following designated beneficiaries:

(1) Surviving spouses;

(2) Minor children of the IRA owner until age 21 0 but not grandchildren;

(3) Disabled individuals – under the strict IRS rules;

(4) Chronically ill individuals; and

(5) Individuals older than or not more than 10 years younger than the IRA owner.

Any IRA beneficiary who is not an EDB – a ‘non-eligible designated beneficiary” (NEDB) – and who inherited an IRA of any IRA owner who died after December 31,2019 had to withdraw the entire amount of his or her inherited IRA within 10 years of the IRA owner’s death. During early 2022, the IRS issued additional rules that if an IRA owner died on or after his or her required beginning date (RBD), then an NEBD is subject to RMD during the 10-year period following the year of death of the IRA owner. A penalty applies if an NEDB misses an RMD in any year of the 10-year period.

However, the IRS gave relief to NEDBs who missed 2021 and 2022 RMDs. In IRS Notice 2022-53, the IRS excused missed 2021 RMDs by NEDBs if the IRA owner died in 2020 on or after the owner’s RBD. It also relieved missed 2022 RMDs by an NEDB if the IRA owner died in 2021 on or after the owner’s RBD.

The RBD for IRA owners who died in 2020 or 2021 is age 70.5 (if the IRA owner was born before July 1, 1949) while the RMD for IRA owners who died in 2022 is age 72 if the IRA owner was born between July 1,1949 and December 31, 1950.

The IRS further extended RMD relief in IRS Notice 2023-54 by excusing missed RMDs for NEDBs of IRA owners who died in 2022 and who miss 2023 RMDs. Those NEDBs subject to the 10-year payout rule and whose IRA owner died in 2020 or 2021, and who miss 2023 RMDs also get relief under IRS Notice 2023-54.

IRA Beneficiaries Who Do Not Get RMD Relief Under IRS Notice 2023-54

The RMD relief under IRS Notice 2023-54 applies only to beneficiaries who inherited from an IRA owner who died after beginning their RMDs during 2020 or later. Under the IRS proposed recalculations, these beneficiaries are subject to RMDs for years one through nine of the 10-year term.

IRS Notice 2023-54 does not affect lifetime RMDs for IRA owners who must still take them and are subject to the IRS penalty for any RMDs that are missed. This RMD relief also does not apply to IRAs inherited by EDBs or RMDs for all beneficiaries who inherited IRAs from IRA owners who died before January 1, 2020. Both of these groups still get to take advantage of the “stretch” IRA.

Roth IRA beneficiaries are also unaffected by both IRS Notice 2022-53 and IRS Notice 2023-54 because they are subject to RMDs for years one through nine of the 10-year term. Under IRS rules, any Roth IRA owner who dies with a Roth IRA is deemed to have died before he or she was required to take RMDs, regardless of their age. This is because there are no lifetime RMDs for Roth IRA owners.