Three Required Distribution Changes You Should Know About

By James Moore, CFP®

It’s that time of year again! As we enter into the final months of 2023, the deadline to comply with the Required Minimum Distribution (RMD) rules is quickly approaching.

Over the past few years, Congress has passed multiple tax laws that have changed the RMD rules. Some of the changes have been relatively easy to understand, but some of the changes have caused a decent amount of confusion. In fact, the IRS has still not decided how they will be enforcing one of the major new RMD rules pertaining to Inherited IRAs (more on that later).

With all the recent RMD changes, we thought it would be helpful to provide a quick refresher regarding a few of the new rules.

RMDs now start at age 73

Beginning in 2023, the new RMD start age is 73. If you will have turned 73 by the end of the year, then you will need to take your first RMD by December 31st.

Technically, you could wait until April 1st of the following year to take your first RMD. However, if you chose to do that, you would end up having to take two RMDs in that following tax year. Usually that doesn’t make sense for most people.

New IRS life expectancy tables

In January of 2022, the IRS released updated life expectancy tables for calculating RMDs. Even though these were effective for 2022, we’ve noticed that not everyone is aware of these new tables. Whether you’ve been using the Uniform Lifetime table, Single Life table, or Joint Life table, it is important to switch to the updated table to make sure you are using the correct factor in your RMD calculation.

If you are just now realizing that you used one of the older tables to calculate your 2022 RMD, there is no reason to panic! Luckily, the new life expectancies are more favorable tax-wise. The tables assume higher life expectancies across the board and therefore all the factors are higher, which will cause RMDs to be lower compared to the older tables. In other words, if you used the older table to calculate your 2022 RMD, you can be assured that took enough to satisfy your RMD for the year. However, going forward, it’s important to use the updated table to make sure you aren’t taking a bigger RMD than you need to!

Inherited IRAs

The SECURE Act significantly changed the RMD rules for Inherited IRAs. Perhaps most notably, the “stretch” provision for non-eligible beneficiaries (most beneficiaries who are not included in one of the categories that qualify for special treatment, such as a surviving spouse) was eliminated. Instead, non-eligible beneficiaries inheriting an IRA generally have to take RMDs using the 10-year rule.

However, there’s been some confusion regarding the 10-year rule. The initial understanding of this rule was that the beneficiary had to withdraw the entire balance of the IRA within 10 years of inheriting it, but they had flexibility within those 10 years. For example, the beneficiary could choose to take no withdrawals for the first 9 years and then withdraw the entire account balance in the final tenth year. As long as the entire account balance was withdrawn within 10 years, the 10-year rule was satisfied. This interpretation was the general consensus of tax experts and seemed to be consistent with Congress’ intent regarding the law.

However, in early 2022, the IRS released proposed regulations that were contrary to this interpretation. The IRS said that the understanding described above was correct only if the original account owner HAD NOT started RMDs before he or she passed away. If the original account holder HAD started RMDs before he or she passed away, the beneficiary would be required to completely withdraw the account balance within 10 year AND take an annual RMD each of those 10 years.

This caught many people, including tax and financial professionals, off-guard. The IRS was aware that their interpretation was causing a lot of confusion, so they waived the penalties for failing to take the annual distribution described above for 2021 and 2022. And this July, the IRS released Notice 2023-54, which announced that they would again delay the penalties for 2023 (in essence waiving the distribution requirement).

Even though the SECURE Act was passed in December of 2019, the IRS has still not issued final guidance on this issue.

As it stands now, if you own an Inherited IRA under the 10-year rule, you are not required to take a distribution for 2023. However, even though you won’t be forced to take a distribution, it could actually be in your best interest to do so. Depending on your situation, it might make sense to take smaller distributions throughout the 10-year period so you don’t have a larger distribution toward the end, causing a spike in income.

Questions?

If you have questions about how these new RMD rules impact your unique situation, our Fullerton financial advisory firm is happy to talk with you. Please feel free to visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.