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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Ed Slott: RMDs Are a Nightmare This Year. Here’s What Advisors Should Do.

By Melanie Waddell

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Advisors are “getting hammered” with one big year-end tax question from clients now, according to IRA and tax expert Ed Slott: Do I have to take a required minimum distribution for 2023?

While it “sounds simple,” Slott of Ed Slott & Co. relayed, RMDs “are confounding advisors this year like never before.”

That’s the “most important year-end tax advice advisors can help their clients with,” Slott told ThinkAdvisor in a recent email exchange. Advisors “need to have this info down pat when clients call.”

Slott detailed for ThinkAdvisor in a question-and-answer format the layers of RMD rule changes that advisors are sifting through, stemming from the original Setting Every Community Up for Retirement Enhancement (Secure) Act, the IRS’ proposed regulations on the Secure Act, and changes under Secure 2.0. “Keep this guide on your desk!” Slott advised.

This exchange has been edited for clarity.

THINKADVISOR: What’s different this year in terms of taking RMDs?

ED SLOTT: The RMD rules have gone through several recent changes for IRA owners, company plan participants and beneficiaries. This stems from layers of RMD rule changes from the original Secure Act, the IRS proposed regulations on the Secure Act (which threw lots of people for a loop), and then Secure 2.0.

In addition, the RMD rules became so baffling that the IRS had to release several notices providing RMD relief, but that relief inadvertently added to the confusion since the relief applied to some groups but not others.

These issues combined have added more difficulty than ever before to determining which clients will be subject to RMDs this year. RMDs affect every client with a retirement account. Even if clients are not yet subject to RMDs, they may want to make plans now to minimize taxes on future RMDs for themselves and their beneficiaries.

Advisors are already receiving questions on this as the year winds down, and many advisors are not sure what to answer. Plus, there’s lots of misinformation out there.

Why is missing an RMD a big deal?

Because missing an RMD, or not taking the right amount, can subject both IRA owners and beneficiaries to RMD penalties, and those rules have changed as well beginning this year.

Secure 2.0 lowered the longtime draconian 50% RMD penalty to 25% and even to 10% if the missed RMD is timely made up (generally within two years).

The penalty can still be waived entirely by filing IRS Form 5329 and requesting the waiver for good cause — like outright confusion over these rules! But no advisor or accountant wants to go this route. They’d rather get it right the first time and avoid the extra filings and correspondence, which only reminds clients that there was a problem — and that’s not good.

Who’s subject to RMDs this year?

For IRA owners or plan participants, lifetime RMDs now begin at age 73 (under Secure 2.0, which increased this from age 72). But only clients who turned age 72 this year (in 2023) qualify for delaying RMDs until age 73. If a client turned 72 last year (in 2022), they are subject to RMDs this year. Anyone who turned 72 last year still had to take their first RMD (for 2022) by April 1, 2023, and their second RMD (for 2023) by the end of this year.

An easier way to explain this to clients might be that anyone born in 1950 or earlier will have an RMD this year. Anyone born in 1951 or later will not have an RMD this year. However, those clients in company plans who are still working may qualify to delay RMDs until they retire, if the plan allows this — and most do.

Roth IRA owners are never subject to lifetime RMDs, but Roth 401(k)s are subject to RMDs for this year. This changes next year when RMDs for Roth 401(k)s are eliminated.

For IRA beneficiaries, who’s subject to RMDs this year?

Any designated IRA or Roth IRA beneficiary who inherited before 2020 (before the original Secure Act became effective) qualified for the stretch IRA and gets to continue that. They must stay on that RMD schedule. They will still be subject to RMDs this year, and they do not qualify for any IRS RMD relief for 2023.

Eligible designated beneficiaries (EDBs) under the Secure Act still qualify for the stretch IRA, and they must stay on that RMD schedule. They do not qualify for any IRS RMD relief for 2023. EDBs are surviving spouses, minor children of the deceased IRA owner (but only up to age 21), disabled or chronically ill beneficiaries, or non-spouse beneficiaries who are not more than 10 years younger than the deceased IRA owner (or if they are older).

Who’s NOT subject to RMDs this year?

Designated beneficiaries who inherited in 2020 or later, from an IRA owner who died before reaching his or her RBD (required beginning date).

These beneficiaries are subject to the 10-year rule, meaning that all the inherited funds must be withdrawn by the end of the 10th year after death. But since they inherited from an IRA owner who had not yet begun RMDs, they are not subject to RMDs for years 1-9 of the 10-year term, so those in this group are not subject to RMDs by the end of this year.

Designated beneficiaries who inherited in 2020 or later, from an IRA owner who died after reaching his or her RBD.

These beneficiaries are subject to the 10-year rule, like the group above, but since they inherited from an IRA owner who had already begun RMDs, they must take annual RMDs for years 1-9 of the 10-year term. These RMDs are based on their own age. But you don’t have to know that for this year because this got so confusing that the IRS said that these RMDs will be waived for 2023. So, this group is not subject to RMDs by the end of this year.

This RMD relief was announced earlier this year (Notice 2023-54). The IRS provided similar relief for 2021 and 2022, which shows how much confusion there is here.

Designated Roth IRA beneficiaries who are not EDBs are not subject to RMDs this year. Roth IRA beneficiaries are still subject to the 10-year rule, but they are not subject to RMDs for years 1-9 of the 10-year term, regardless of the age of the Roth IRA owner they inherited from.

That’s because under the law, all Roth IRA owners are deemed to have died before reaching their required beginning date, since Roth IRA owners are not subject to lifetime RMDs.

Melanie Waddell

@Think_MelanieW

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