Rules for Inherited IRA Distributions – What Are the Latest Changes?
Key Points – Rules for Inherited IRA Distributions – What Are the Latest Changes?
- Breaking Down IRS Notice 2023-54
- Relief for Missed RMDs
- The Rules for Inherited IRA Distributions Keep Changing
- Reviewing the SECURE Act 2.0
- 4 Minutes to Read | 23 Minutes to Watch
IRS Issues Notice 2023-54: How Did It Impact Rules for Inherited IRA Distributions?
The rules for satisfying Required Minimum Distributions can be incredibly difficult to understand, but they are incredibly important. They just changed again following IRS Notice 2023-54 that was issued on July 14, but this time there is some good news regarding rules for inherited IRA distributions. Here are the two notable changes.
- The notice provides relief for 2023 missed RMDs for non-eligible designated beneficiaries who must follow the 10-year payout rule.
- For those who took or who were given unnecessary IRA distributions in 2023, the notice extends a 60-day rollover deadline to roll them back into their accounts.
Let’s dive into some key takeaways about these rule changes for inherited IRA distributions.
Did You Have a Missed RMD in 2023? It Could Be Your Lucky Day
You might remember that on October 7, the IRS issued Notice 2022-53. That notice waived the 50% penalty on missed 2021 and 2022 RMDs on IRAs that fell within the 10-year rule. Once that notice was announced, the earliest that the 50% missed RMD penalty was going to be imposed for missed distributions within the 10-year payout window was 2023.
With Notice 2023-54 comes another year of relief. Missed RMDs in 2023 are being waived for non-eligible designated beneficiaries of IRA owners who passed away in 2020 or 2021 following their required beginning date. Non-eligible designated beneficiaries of IRA owners who passed away in 2022 following their required beginning date are also getting relief for missed RMDs in 2023.
Remembering SECURE 2.0’s Impact on Rules for Inherited IRA Distributions
We’ve covered the SECURE Act 2.0 at great length since it went into effect on January 1, 2023. One provision of SECURE 2.0 was that the penalty for a missed RMD went from 50% to 25%. And there was a possibility that it could be lowered to 10% if the missed RMD was satisfied a specified correction window. Well, thanks to Notice 2023-54, missed RMDs in 2023 are being waived for the sector of people we just mentioned in the previous paragraph.
The relief is certainly good news for those people. However, it’s still unclear whether those RMDs will need to be satisfied sometime after 2023. This has been a rollercoaster of different rules to follow for inherited IRA distributions. It’s very important to work with a team of professionals to make sure you’re following the right rules.
“The IRS hasn’t clarified yet whether you’ll need to go back and make up those missed RMDs from 2021, 2022, and 2023 starting in 2024.” – Dean Barber
A 60-Day Rollover Deadline Pushed to September 30 for Unnecessary Distributions
The second part of the notice is an extension of the 60-day rollover deadline for any IRA and plan account owners that were impacted by the RMD age going up to 73. The RMD age was raised from 72 to 73 as part of SECURE 2.0. It’s set to increase again to 75 in 2033.
Prior to SECURE 2.0, account owners born in 1951 would have been subject to RMDs starting last year. They now have their first year of RMDs in 2024, but what happens if you were unintentionally paid a distribution by your IRA custodian or plan administrator last year? There were instances in which that snafu happened. Those distributions don’t officially count as RMDs because of the RMD age change with SECURE 2.0.
To make up for any inadvertent distributions that were paid out between January 1 and July 31, 2023, the IRS extended its deadline for rolling them back into accounts to September 30. If you’ve already rolled over an IRA distribution within the past year and are worried about breaking the once-per-year IRA rollover rule because of this, don’t fret. The type of rollover wouldn’t put you in violation of that rule. However, the second rollover would begin a new year-long window, so you couldn’t roll over another distribution for another year.
Planning for RMDs
Even if you’re still a few years away from being subject to RMDs, you need to start planning for them. As you can see, the rules for inherited IRA distributions and understanding when to take RMDs is extremely complex. This is why we emphasize tax planning as much as we do. It’s all about paying as little tax as possible over your lifetime, not just in one year.
Working with a CFP® Professional who works alongside a CPA is critical because the CPA will review your financial plan for tax planning opportunities. You can learn about those opportunities by reviewing our Tax Reduction Strategies guide. It discusses Roth conversions, Qualified Charitable Distributions, and so much more that directly correlate with planning for RMDs. Get your copy below and share it with your friends and family as well.
What Does It Mean to Be a Roth-a-holic?
Let’s touch a little bit on Roth conversions as a tax planning strategy before we wrap up this discussion on rules for inherited IRA distributions. Those who know Bud Kasper know that he considers himself to be a Roth-a-holic. He loves taking advantage of the tax-free Roth to help people mitigate taxes over their lifetimes.
“When you have money in a Roth account, you eliminate a lot of the complexity of these rules. I invite you to understand what Roth conversions are about and become a Roth-a-holic like me.” – Bud Kasper
The reason why the Roth IRA is still a good wealth transfer tool is because it’s tax-free for your beneficiaries. There’s also no RMD on the Roth IRA for the original IRA owner. Therefore, there’s never a required beginning date for that IRA owner. All non-eligible designated beneficiaries can leave the money in the Roth for the full 10-year period and at the end of it, everything that comes out is tax-free.
“Think about that for your surviving spouse, children, and grandchildren. They can leave money in the Roth IRA, let it accumulate for a 10-year period. At a 7.2% return, that Roth IRA would’ve doubled in value over that 10-year period using the Rule of 72 and then come out totally tax-free. That can have a magnificently positive impact on your children, grandchildren, and surviving spouse.” – Dean Barber
Do You Have Questions About These New Rules for Inherited IRA Distributions?
If you have questions about what tax reduction strategies might work for you and/or rules for inherited IRA distributions, let us know. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals and/or CPAs by clicking here. We can meet with you in person, virtually, or by phone—it’s whatever works best for you. We look forward to helping you clear the air about these complex rules for inherited IRA distributions and hopefully giving you more clarity and confidence in retirement.
Rules for Inherited IRA Distributions – What Are the Latest Changes? | Watch Guide
00:00 – Introduction
01:35 – It’s Confusing
03:01 – Three Types of Beneficiaries
05:27– Why Did the Govt. Do This?
06:08 – TRIVIA
07:00 – Traditional IRAs Are BAD for Wealth Transfer
09:45 – IRS Notice 2023-54
12:54 – Roth IRA to Eliminate Uncertainty
16:59 – Dean Tells a Charitable Story Reducing Taxes
19:03 – What We Learned Today
Resources Mentioned in the Episode
Articles
- RMD Strategies for Before and After Retirement
- RMD Penalty Waived for 2021 and 2022 Missed RMDs within 10-Year Rule
- Understanding the SECURE Act 2.0 with Ed Slott
- Tax Planning Strategies with Marty James
- Roth Conversions Before and After Retirement
- What Is a QCD? Qualified Charitable Distribution
- Why Compound Interest Is Key
- Tax Planning Tips with Corey Hulstein, CPA and Marty James, CPA, PFS
Past Episodes
- Transferring Wealth: IRAs Are a Bad Option
- RMD Age for 2023: What’s Your Required Beginning Date?
- What Is Tax Planning?
- Asset Allocation vs. Tax Allocation
Downloads
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.