Because of the ongoing confusion concerning IRA required minimum distributions (RMDs), the IRS in Notice 2023-23 and Notice 2023-54 provided limited relief to both owners and beneficiaries of IRAs.
This column is the first of two columns discussing this IRS relief and how it could affect some federal employees and retiree IRA owners and beneficiaries. This column discusses IRS relief for IRA owners who initially had to take their first RMD during 2023 but as a result of a law change in late 2022 did not have to.
SECURE 2.0 Act (which was passed into law on December 30, 2022) raised the RMD age of 72 (which was the RMD age set by the passage of SECURE Act 1.0 in December 2019).
Prior to the passage of SECURE Act 1.0, the RMD age (known as the “required beginning date” or RBD) was age 70.5. The passages of SECURE Act 1.0 and SECURE Act 2.0 have resulted in the change of the RBD depending on when an IRA owner was born.
The following table summarizes the RBD depending on when an IRA owner was born:
One of the consequences of the late passage of SECURE Act 2.0 on December 30,2022 was that some IRA owners were not aware of the change in the RBD from age 72 to age 73, especially those IRA owners born sometime during 1951.
Some IRA owners born during 1951 took their IRA RMDs in January and February 2023. They were not aware of the fact that their RBD had changed from age 72 to age 73. Because of SECURE Act 2.0’s passage they were in fact not required to take their first RMD until 2024 when they become age 73.
Without any IRS relief for taking their IRA distributions they were not required to, they owe federal and state income taxes on their distributions. Adding to the problem was that some IRA custodians at financial institutions including banks, credit unions and brokerages sent notices to their IRA owners born in 1951 that the IRA owners had to take their first IRA RMD for the year 2023.
On March 7, 2023, the IRS issued Notice 2023-23 granting relief to those financial institutions to correct their RMD letters. In particular, the institutions were told to correct their letters to inform IRA owners born during 1951 that they did not have to take their first RMD during 2023. However, in Notice 2023-23, the IRS did not grant any relief to IRA owners who took in early 2023 what they thought were necessary 2023 RMDs.
But the IRS in Notice 2023-54 (issued on July 14,2023) provides RMD relief for IRA owners who took 2023 RMDs early in 2023 but did not have to. Under Notice 2023-54, IRA owners who took their 2023 RMDs anytime before July 31,2023 have until September 30,2023 to return these IRA distributions into their IRA accounts, even though the normal 60-day rollover period may have passed.
IRS rules state that an IRA RMD can never be rolled over. However, these IRA distributions are in fact not RMDs; therefore, they are eligible to be rolled over under IRS Notice 2023-54.
There are two consequences for affected IRA owners who took their 2023 IRA RMDs but did not have to. They are:
1. Once-per-year IRA rollover rule
The once-per-year IRA rollover rule allows an IRA owner to perform only one IRA-to-IRA rollover per 365 days. However, the rollback of a 2023 IRA RMD to an IRA is allowed even if an IRA-to-IRA or Roth IRA-to-Roth IRA rollover was performed within the last 365 days. But the rollback of a 2023 RMD to an IRA will trigger a new 365-day period going forward to which no further IRA-to-IRA rollovers can be performed.
2. Roth IRA conversion opportunity
Since IRA RMDs cannot be rolled over, a Roth IRA conversion (which in fact is a rollover) cannot be performed on an RMD.
However, those IRA owners who took their 2023 RMDs before July 31,2023 (but in fact did not have to) can instead of rolling back their IRAs, they can convert their 2023 RMDs to a Roth IRA. The IRA owner has to pay tax on the conversion. The deadline to perform this Roth IRA conversion is September 30, 2023.