Appleby’s Top 5 RMD Rules for 2023
RMDs can be tricky. Know how to avoid missteps that result in owing excise tax to the IRS.
IRA owners and beneficiaries must take their required minimum distributions (RMDs). Failure to take RMDs by the deadline will result in the IRA owner or beneficiary owing the IRS an excise tax. Participants in employer-sponsored retirement plans are also subject to RMDs.
IRA owners, beneficiaries with inherited accounts, and practitioners can avoid the excise tax by following the governing RMD rules.
I discuss these rules in detail in my course RMD Rules and Strategies Every IRA Practitioner Must Know!If you have a current membership with Denise Appleby, you can get the course material (recording and handouts) here at no additional cost
The following is an overview of my top five RMD rules. If you prefer audio, please listen to the 5-minute overview here. While the term IRA is used in this article, the rules discussed also apply to employer-sponsored retirement plans.
1. Know the applicable RMD Ages
SECURE Act 1.0 increased the starting age for RMDs from 70 ½ to 72. As a result, for anyone who reached age 70 ½ before 2020, their first RMD year is the year they reached 70 ½.
For those who reached age 70 ½ after 2019, the year they reached age 72 is their first RMD year. This age 72 rule applies up to 2022 because SECURE Act 2.0 increased the RMD age to 73 and 75, effective 2023. As a result of this change, an individual who reached age 72 in 2023 does not have an RMD for 2023. Instead, their first RMD would be due in 2024, when they reach age 73.
Please note: RMDs for employer-sponsored plans can be deferred past these ages until retirement if the terms of the plan allow. Participants must check with their plan administrator to determine if they are eligible to defer RMDs past these ages until retirement.
Interested parties must know the applicable RMD age for an IRA owner to determine when the IRA owner must start taking RMDs.
Knowing an IRA owner’s applicable RMD age is also important for a beneficiary because it determines whether the beneficiary inherited the IRA from someone who died before their required beginning date (RBD). And whether an IRA owner died before their RBD determines the distribution options available to the beneficiary.
A schedule of the applicable RMD age is included in my presentation, RMD Rules and Strategies Every IRA Practitioner Must Know!
2. Know when a distribution qualifies to be an RMD
Generally, the first distribution taken from an IRA during an RMD year is counted towards the IRA owner’s RMD for that year. However, not all distributions qualify to count as RMDs. The question for interested parties is whether a distribution taken by an IRA owner or plan participant contributes to satisfying their RMD. For example, a return of excess distribution does not count as an RMD; neither does a loan that is treated as a deemed distribution.
3. Check the accuracy of the custodian’s RMD calculation
The custodian that held an IRA on December 31 of the year preceding the RMD year must calculate the RMD for that IRA. For example, the custodian that held IRA Number 123456789 on December 31, 2023, is responsible for calculating the 2024 RMD for that IRA. That custodian must provide the IRA owner with an RMD notice by January 31, 2024. The RMD notice must include either the calculated RMD amount or an offer to calculate the amount upon request.
The IRA custodian can make certain assumptions or ignore transactions that could result in incorrect RMD calculations. For example, if an IRA owner took a distribution in 2022 and rolled it over in 2023, the rolled-over amount would not have been included in the December 31, 2022, fair market value (FMV) used by the IRA custodian to calculate the RMD. One must, therefore, refigure the RMD using the adjusted FMV. The adjusted FMV is the FMV provided by the IRA custodian plus the amount rolled over in 2023.
Reminders:
- IRA custodians are not required to calculate RMDs for Beneficiary IRAs.
- Generally, the administrators for employer-sponsored retirement plans calculate RMDs for plan participants and beneficiaries.
4. Avoid Ineligible rollovers of RMDs.
RMDs must be taken before a rollover from an employer plan or an IRA and before any Roth IRA conversions. If the RMD is not taken before the rollover, the RMD amount is an ineligible rollover.
For example, assume that Jan’s 2023 RMD for her traditional IRA is $10,000. Assume that Jan took a distribution from her traditional IRA, and this $50,000 is her first distribution for 2023. Because it is her first distribution, it includes her RMD, and only $40,000 may be rolled over. If Jan rolled over the entire $50,000, $10,000 would be an ineligible rollover.
If an ineligible rollover is made to an IRA, it creates an excess contribution if the amount exceeds the amount the individual is eligible to contribute for the year. Excess contributions must be properly corrected to avoid owing the IRS excise tax on the amount.
5. There are limited options for aggregating RMDs
An individual who owns multiple retirement accounts may aggregate RMDs for those accounts. However, aggregation may be done only in limited circumstances. For example, if an individual owns multiple traditional IRAs, SEP IRAs, and/or SIMPLE IRAs, the RMDs for those IRAs must be calculated separately but taken from one or more of those IRAs. That is referred to as RMD aggregation.
The following are examples of impermissible aggregation
- RMD aggregation between a Traditional IRA and a 401(k).
- RMD aggregation between a beneficiary IRA and the individual’s own IRA.
Getting Ready for the December 31 Deadline
RMDs must generally be distributed by December 31 of the year they are due. An exception applies to the IRA owner or plan participants’ first RMD year. Under that exception, the RMD for that year can be taken as late as April 1 of the following year. If that RMD is deferred until the following year, the individual must take two RMDs for that (following)year. IRA owners must consult their tax advisors regarding the tax impact of deferring their first-year RMD.
RMDs are due from inherited IRAs and employer plan accounts for this year in two cases: (a) if the beneficiary inherited the account before this year and is taking distributions under the life expectancy rule, or (b) if the beneficiary is subject to the five-year rule and this is the end of the five years. Remember that 2020 is not counted when counting the five years due to the waiver of the RMDs under the CARES Act.
RMD requests should be submitted to financial institutions before the December 31 deadline to help ensure processing by the end of the year. Some financial institutions have a deadline earlier than December 31 in anticipation of an increase in volume that often occurs during the end of the year. Such custodians usually promise that requests received by their internal deadline will be processed by the end of the year. Requests received after their deadline are usually handled on a best-efforts basis.
To learn more about the RMD rules, please listen to my course, RMD Rules and Strategies Every IRA Practitioner Must Know!
