RMDs: Everything Advisors Need to Tell Clients Now

The Internal Revenue Service issued a sweeping notice Wednesday on required minimum distributions — including who should be taking them now, changes under the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act, what do to about missed distributions and how to handle RMDs from inherited IRAs.

RMDs are taxable income and may be subject to penalties if not timely taken.

For individuals born before 1951, who turned 73 or older this year, “RMDs from IRAs and retirement plans should, for the most part, already have begun and are required for 2023,” the IRS states.

However, the Secure 2.0 Act raised the age that account owners must begin taking RMDs in 2023, from 72 to 73.

Because of this change, individuals born in 1951 must receive their first RMD by April 1, 2025, the IRS said.

IRAs

The RMD rules “require individuals to take withdrawals from their IRAs (including SIMPLE IRAs and SEP IRAs) every year once they reach age 72 (73 if the account owner reaches age 72 in 2023 or later), even if they’re still employed,” according to the IRS.

“Owners of Roth IRAs are not required to take withdrawals during their lifetime. However, after the death of the account owner, beneficiaries of a Roth IRA are subject to the RMD rules,” the IRS said.

Retirement Plans

The RMD rules also apply to employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans.

“Participants in employer-sponsored retirement plans can delay taking their RMDs until they retire, unless they are a 5% owner of the business sponsoring the plan,” according to the IRS notice.

Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2023.

Beginning in 2024, “designated Roth accounts will not be subject to the RMD rules while the account owner is still alive,” the IRS explains.

Missed RMD Penalties

“If an account owner fails to withdraw the full amount of the RMD by the due date, the owner is subject to an excise tax equal to 25% of the amount not withdrawn for 2023 and later years,” the IRS states.

The Secure 2.0 Act “dropped the excise tax rate from 50% for distributions required for 2023 and reduces the tax rate to 10% if the error is corrected within two years,” according to the agency.

The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD was required but not taken, the agency explained.

Inherited IRAs

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner.

As the IRS explains, the factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include:

• Whether the account owner died after 2019 (the Secure Act made changes to the RMDs for beneficiaries if the death of the account holder occurred after 2019).
• The relationship of the beneficiary to the account owner and certain characteristics of the beneficiary (spouse, minor child, disabled or chronically ill individual, entity other than an individual).
• Whether the original account owner passed away before or after their required beginning date (the date the original account owner was required to begin taking RMDs).

IRS Notice 2023-54 provides that certain non-spouse beneficiaries subject to the 10-year distribution rule will not fail the RMD requirements because they didn’t make distributions in 2023, according to the IRS.