Making sense of rapidly shifting rules for Required Minimum Distributions (RMDs) is crucial to avoiding unnecessary taxes.
However, the accelerating pace of modifications in recent years has made navigating RMDs increasingly complicated…and now the clock is ticking for taxpayers and administrators to adjust systems and strategies to reflect new realities.
Fortunately, recent IRS guidance for 2023 provided helpful — albeit temporary — relief for certain RMDs, taking some pressure off taxpayers navigating the changing rules.
If you recently took an RMD, plan to before the end of the year, or want to understand how the landscape is shifting, read on for a full breakdown of the IRS relief, what it means for your RMDs, and key actions to consider.
To put it more simply: Think of RMDs as a rule set by the U.S. government that makes sure you don’t just accumulate money in your retirement accounts forever and evade taxes. Essentially, they are a way for the government to ensure it gets its share.
Once you reach a certain age, which was previously 72 but is currently 73 as of 2023 onwards, you must start withdrawing a minimum amount from your retirement account every year. The exact number is calculated based on the total value of your account and your life expectancy according to IRS charts.
What’s important to remember is that these withdrawals are not optional — they are mandatory, hence the term ‘required.’ The money you withdraw counts as taxable income, meaning you’ll have to pay a portion back to the government.
Also, remember that this rule applies to most retirement accounts, except for Roth IRAs, where RMDs don’t kick in until after the owner has passed away.
The deadline for making these withdrawals is December 31 each year. If you miss this deadline, a hefty penalty can be imposed.
First, the ‘Secure Act’ of 2019 increased the age at which RMDs begin from 70½ to 72, giving retirees more time to grow their retirement savings. Further building on this, the ‘Secure Act 2.0’ increased the starting age for RMDs to 73, effective January 1, 2023.
This legislation provided an additional year for individuals to increase their tax-free retirement savings.
Then, very soon after, the ‘Secure Act 2.0’ also decreased the penalty for failing to take an RMD, allowing for higher catch-up contributions, enabling matching for Roth accounts, increasing limits for qualified charitable distributions, and boosting options for eligible longevity annuity contracts.
The rapid changes to RMD rules have caused some issues this year.
Primarily, automated processes administered by IRA custodians, plan administrators, and service providers have yet to be updated immediately to reflect new realities.
Systems built around previous RMD rules are still running — and generating incorrect RMD amounts in some cases.
There is also confusion around which new rules impact 2023 RMDs versus being deferred until future years. For instance, under the ‘SECURE Act 2.0,’ the required beginning date for RMDs increased to age 73 starting in 2023. So, an individual born in 1951, turning 73 in 2024, would see their first RMD year shift from 2023 to 2024.
However, some payer systems are still incorrectly generating 2023 RMD amounts for these taxpayers, unaware of the required beginning date increasing to 73. The same applies to the revised 10-year rule for beneficiaries, which exempts certain individuals starting in 2023.
Lastly, systems blindly applying the 10-year framework across the board could incorrectly limit inherited RMDs.
With so much in flux, payer systems need time to catch up. But in the interim, taxpayers face avoidable RMD issues through no fault of their own. To help navigate this transitional period, the IRS provided guidance through IRS Notice 2023-54, which offered temporary flexibility and relief to individuals and plan administrators dealing with RMDs.
The notice extended the deadline for completing indirect rollovers of mischaracterized RMDs (that deadline, September 30, 2023, has now passed).
Additionally, the notice provided relief for those who didn’t take an annual RMD following the death of the participant/IRA owner in 2021, 2022, or 2023. It also stated that final regulations regarding RMDs will not apply until 2024 at the earliest, giving individuals and plan administrators more time to adjust to the new rules.
In simpler terms, this notice was like a grace period from the IRS, giving people more time and flexibility to manage their retirement distributions without facing penalties.
But it’s critical to understand exactly who qualified for this relief and how to leverage it.
Whether you qualify depends on your specific situation. Let’s walk through key taxpayer scenarios.
You may qualify if:
You likely won’t qualify if:
Bottom line — this relief is limited to specific situations stemming from the recent RMD rule changes that systems haven’t caught up with yet.
Even though certain deadlines have passed, there are still some helpful actions you can take to set yourself up for 2024’s RMD landscape.
Here’s how to get ahead:
Staying nimble amidst regulatory changes takes work. But those who put in the effort now will be poised to smoothly navigate 2024’s RMD landscape.
While 2023 offers some reprieve, remember that this relief is only temporary, and additional transitional challenges may remain even in 2024 and beyond — so remaining nimble is key.
An RMD strategy tailored to the evolving rules can help you navigate change seamlessly, but it’s vital to stay vigilant and responsive to new guidance to avoid missteps. As always, the best way to ensure you maximize your strategy is to consult with tax professionals (like us!).
So review your situation to see if you qualify for relief — and take timely action to leverage the flexibility while you can.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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