Federal employees and retirees who own traditional IRAs are subject to required minimum distributions (RMDs) from their traditional IRAs once they reach their required beginning date (RBD). This means that each year they must withdraw at least a minimum amount from their traditional (the RMD) for the rest of their lives.
What is the RBD? Before the passage of SECURE Act 1.0 in December 2019, the RBD was April 1 following the year an IRA owner became age 70.5.
When SECURE Act 1.0 became law in December 2019, the RBD was changed as follows: For any IRA owner born before July 1, 1949, the RBD is April 1st following the year the IRA owner becomes age 70.5. For any IRA owner born after June 30, 1949, the RBD is April 1st following the year the IRA owner becomes age 72.
When SECURE Act 2.0 was passed into law on December 30, 2022, the RBD was changed again as follows: For any retired retirement plan participant (such as the Thrift Savings Plan) or traditional IRA owner born between July 1, 1949 and December 31,1950, the RBD is April 1st following the retired retirement plan participant or traditional IRA owner became age 72.
For any retired plan participant or traditional IRA owner born between January 1,1951 and December 31,1959, the RBD is April 1st following the year the retired retirement plan participant or traditional IRA owner becomes age 73. Any retired retirement plan participant or traditional IRA owner born after December 31, 1959, the RBD is April 1st following the year the IRA owner becomes age 75.
SECURE Act 2.0 therefore changed the age for individuals after December 31,1950 and before January 1, 1952 taking their first IRA RMDs from age 72 to age 73. SECURE Act 2.0 made it clear that the age 73 change applies to individuals who attain age 72 after December 31, 2022.
Any retired retirement plan participant or traditional IRA owner born in 1950 had to take his or her IRA RMD before December 31, 2022, or by April 1, 2023 (this extended deadline option is available only for the first traditional IRA RMD).
The Problem Associated with the RMD Age Change from Age 72 to Age 73
Due to quick passage of SECURE Act 2.0 in late December 2022 and its effective date of January 1,2023, many retirement plan administrators and IRA custodians were unprepared for the RBD age change. Many of the plan administrators and IRA custodians told the IRS that their automated payment systems would need to be updated to accommodate the 72 to 73 age change.
The IRS did in fact provide some accommodation. This accommodation was reported by the IRS in IRS Notice 2023-54 (Transition Relief and Guidance Relating to Certain Required Minimum Distributions).
Retirement plan administrators and traditional IRA custodians indicated that the updates could take some time. As a result, some retirement participant and traditional IRA owners who were born in 1951 may receive distributions from their retirement plans and traditional IRAs in 2023 that were “mischaracterized” as RMDs.
The IRS issued a fix to the problem in order to get “mischaracterized” RMDs back into the retirement plan if, in fact, the retirement plan participant or IRA owner wanted to do so. The IRS relief came in IRS Notice 2023-54 which is discussed next.
IRS Notice 2023-54
IRS Notice 2023-54 did clarify a few items with respect to individuals born in 1951 and who received their RMDs for the year 2023 from a retirement plan (such as a 401(k) plan or the Thrift Savings Plan) between January 1, 2023 and July 31, 2023.
In particular, the clarification states that the distribution does not count as an RMD. Furthermore, the entire amount of the RMD can be redeposited into the retirement plan or into the traditional IRA from which it came as a rollover. Note that this is an exception to an important IRS rule.
Normally, RMDs are not eligible for a rollover or a trustee-to-trustee transfer. In other words, this mischaracterized RMD is not considered an RMD. It can be redeposited with no tax consequences – but only if the redeposit is done in a timely fashion (see below).
IRS Notice 2023-54 also provides relief from the “12-month rollover rule”. In this case, the rollover of the RMD is permitted even if the retirement plan participant or IRA owner had rolled over another distribution within the past 12 months. IRS rules permit only one rollover within a 12-month period.
This is any 12-month period, not just January through December. But the redeposit of a mischaracterized RMD does not count as a rollover with respect to the one every 12-month rollover limitation. Note also that future rollover imitations can be avoided by doing a trustee-to-trustee transfer instead of a rollover.
Timing of the Redeposit/Rollover
Any individual born in 1951 who wants to redeposit a mischaracterized RMD will need to act quickly. The deadline for making the redeposit/rollover is September 30, 2023.
Those individuals born in 1951 who want to make this redeposit/rollover are advised to contact their retirement plan administrator or IRA custodian for information on how to do the redeposit/rollover. They are also advised to talk with their tax advisers before taking any action.