Additional Guidance on 2023 RMDs for Certain Taxpayers
The IRS issued Notice 2023-53 a few weeks ago that would waive the 25% missed RMD penalty for missed distributions from inherited IRAs. However, this does not apply to all taxpayers.
IRS Notice 2023-54 was issued on July 14. This notice indicates that the IRS will waive the current 25% penalty for not taking a required minimum distribution (RMD). However, this only applies to any person who inherited an IRA (or other affected plan) after December 31, 2019.
If you inherited the IRA before this date, then you are required to continue to take an RMD this year. If you skip the RMD, you are subject to a 25% penalty or if you correct it within two years, then the penalty is reduced to 10%.
Example: Fred, age 77, has a RMD of $33,000 due in 2023. If Fred elects to not take this distribution this year, he will incur a 25% tax penalty $(8,250) or if he corrects it by December 31, 2025, the penalty will only be $3,300.
If you inherited an IRA after 2019, then the February 2022 IRS proposed regulations stated that if the deceased taxpayer was required to take an RMD, then you are also required to take an RMD. The IRS indicated that the “Code” states that distributions must be taking “at least as rapidly”. Since the deceased was taking RMDs, then you must also take them.
However, under the old (and current) five-year rule when an estate is a beneficiary, there is not an “at least as rapidly” rule. Therefore, most commentators believe that the IRS may or may not correct this in final regulations.
Many taxpayers in this situation did not take an RMD in 2021 or 2022 and the IRS issued Notice 2022-53 indicating they would waive the 50% penalty for both of those years, but again only if you inherited an IRA after 2019 and the deceased was required to take an RMD.
Now, we come to 2023. Many farmers and other taxpayers took their IRA before the notice came and assume that this now means they can roll the distribution back into the IRA. The answer is you can’t rollover RMDs back into an IRA.
The Notice only provides help if you were required by the Proposed Regulations to take a distribution during 2023 from an IRA inherited after 2019 and elected to not take a distribution this year. Then the notice states no 25% penalty will be assessed.
Example: Jennifer inherits an IRA from her mom in 2022. Her mom is age 69. Under the proposed regulations, no RMD is required by Jennifer since her mom was under the RMD age of 72 (age 72 in 2022, now age 73).
Example: Now let’s assume the Jennifer’s mom is age 75 when she inherits the IRA. In this case, since her mom was required to take an RMD, Jennifer is also required to start taking an RMD in year after her mom’s death. This distribution is due by December 31, 2023. However, under IRS Notice 2023-54 she will not be accessed a penalty if she does not take the distribution. If she already took the distribution, she can’t roll it over.
Remember that the 10-year rule also applies to Roth IRAs. However, there is never any requirement to take a distribution out of a Roth IRA before the 10th year. During life, an individual is not required to take any distributions from Roth IRAs and this carries over to the person who inherits the Roth, other than the requirement to fully deplete by the 10th year.
Finally, the IRS did indicate that the Final Regulations on this issue will only apply to calendar years after 2023. The Final Regulations will not apply to years 2020-2023.