The IRS Published Notice 2023-54 on Friday, July 2023, in which they extended the excise tax waiver on certain RMD failure to 2023. In addition, Notice 2023-54 provides rollover relief for 2023 ‘non-RMDs,’ allowing those who reached age 72 in 2023 to roll over such amounts.
Here is what you need to know in one AppleByte. Why ‘Bytes’? 8 Bits = one byte.
A.The Waiver of the Excise Tax on RMD Shortfalls for Certain Beneficiaries
1. December 20, 2019: SECURE Act 1.0 repealed the life expectancy option for designated beneficiaries and replaced it with the 10-year rule. Per SECURE Act 1.0 language, this 10-year rule works like the 5-year rule under which distributions are optional until the end of the 5th year when the entire balance must be distributed. SECURE Act 1.0, this applies regardless of the age at which the IRA owner died.
2. February 24, 2022: The proposed RMD regulations explained that the At Least As Rapidly Rule (ALAR) still applies. Therefore, if the IRA owner died on/after the required beginning date (RBD), their beneficiary must continue to take annual RMDs at a rate that is at least as rapid as the rate the IRA owner was required to take annual RMDs.
This means that all beneficiaries, including designated beneficiaries, must take annual RMDs if the IRA was inherited from someone who died on/after their RBD.
The public was unhappy about this seeming change in the rules.
3. October 7, 2022: The IRS issued Notice 2022-53, in which they admitted that the relevant SECURE Act 1.0 language was unclear. Consequently, they waived the 50% excise tax (that would otherwise apply on RMD failures) for 2021 and 2023, for beneficiaries who are subject to the 10-year rule and required to take annual RMDs. These beneficiaries are:
- Designated beneficiaries who inherited IRAs from owners who died on/after the RBD. And
- Successor beneficiaries of eligible designated beneficiaries, where the eligible designated beneficiaries were taking distributions under the life expectancy method. For this purpose, eligible designated beneficiaries include designated beneficiaries who inherited IRAs before 2020 and were taking life expectancy distributions and died after 2019.
Notice 2022-53 provided that a qualifying beneficiary (a. or b. above) who paid the excise tax for 2022 could claim a refund for the amount.
4. July 14, 2023: The IRS issued Notice 2023-54, extending the waiver to 2023. As a result, the excise tax is waived for 2021, 2022, and 2023 for qualifying beneficiaries.
B. The Waiver of the 60-Day Deadline for ‘Non-RMDs’ for IRA owners who reached age 72 in 2023.
5. December 29, 2022: SECURE Act 2.0 increased the RMD age and created an applicable RMD age schedule based on when the IRA owner was born. This is effective starting 2023.
6. IRA owners who reached age 72 in 2023 benefit from this new RMD age increase and have no RMDs for 2023.
7. Some IRA custodians could not stop RMD notices from going out to IRA owners who reached age 72 in 2023. As a result, some of these IRA owners might have taken distributions that they thought were RMDs. Plan administrators faced the same challenge and might have sent out distributions intended to be RMDs (but are not RMDs because of the SECURE Act 2.0 increase in RMD starting ages).
8. July 14, 2023: The IRS issued Notice 2023-54, under which they explained that because these amounts are not RMDs, they can be rolled over within 60 days of receipt. The 60-day period is extended under Notice 2023-54, allowing the rollovers to be completed by September 30, 2023. This applies to the following distributions, where they would have been RMDs had it not been for SECURE Act 2.0
- Distributions from an employer plan between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse), and
- Distributions made from an IRA between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or that individual’s surviving spouse)
For IRAs, the one-per-year IRA-to-IRA rollover limitation does not apply for the lookback period (it can still be done even if the IRA owner already performed an IRA-to-IRA rollover during the 12-month period that preceded receipt of the RMD. But this one-per-year limitation applies to the twelve-month period after the distribution.
This is a high-level summary. More information is needed to adequately explain the provisions to clients. Taxpayers should consult with their advisors.
