In response to recent legislative changes affecting the age at which taxpayers must start taking required minimum distributions (RMDs) from retirement funds, the IRS has released new guidelines offering transitional relief.

The retirement and estate planning landscape underwent significant changes due to the SECURE Act, passed in late 2019. The age at which owners of retirement accounts must start taking their RMDs typically rises as a result. Traditional IRAs and other qualifying plans now have a 72-year-old required beginning date (RBD), up from the previous age of 701.

The SECURE 2.0 Act further raised the RBD age for RMDs three years later, in December 2022. The age rose to 73 this year, with expectations to reach 75 in 2033.

Relief for RMDs and inherited IRAs

The RBD is the first day of April in the calendar year after a person achieves the appropriate age. As a result, April 1, 2025, rather than April 1, 2024, will be the RBD for an IRA owner born in 1951. A distribution made for 2024 will be the first one given to the IRA owner as a taxable RMD.

The postponement of RMDs is generally good news for income tax purposes. However, it also causes some misunderstanding among retirees. It also forces plan administrators to change their automatic payment systems. For instance, retirees turning 72 may have started receiving distributions this year because they believed they had to begin drawing RMDs by April 1, 2024.

Administrators and other payors worry that implementing the adjustments might take some time. They claim that as a result, payments made in 2023 to plan participants and IRA owners who would have been required to begin receiving RMDs for the calendar year 2023 before SECURE 2.0 (i.e., those who turn 72 in that year) could have been mistakenly classified as RMDs. This is crucial because RMDs would be included in gross income for tax purposes since they would not be eligible for a tax-free rollover to an approved retirement plan.

The IRS response

The IRS is extending the 60-day window for rollovers of distributions with an incorrect classification of the RMDs due to the RBD’s adjustment from age 72 to age 73 to provide some relief. The new deadline for rolling over such payouts is September 30, 2023. It also applies to payments received between January 1, 2023, and July 31, 2023.

For instance, a plan participant born in 1951 would have until the end of September to roll over the portion of a single-sum distribution that was ineligible for a rollover because it was mistaken as an RMD in January 2023. The distribution will be regarded as taxable income if the deadline passes without being carried over.

The mischaracterized IRA distributions given to an IRA owner (or surviving spouse) are likewise subject to the rollover. The subsequent rollover will prevent the owner or surviving spouse from undertaking another rollover in the next 12 months. However, it does apply even if the owner or surviving spouse rolled over a payout within 12 months. The person might still directly transfer from trustee to trustee.

Additionally, assistance is provided to payors and plan administrators. Suppose a distribution would have been an RMD before SECURE 2.0’s adjustment to the RBD. In that case, there is no penalty for failing to treat any distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that member’s surviving spouse).

More to come

When the IRS publishes the final regulations, we’ll let you know how they might apply to you. Do not hesitate to contact RRBB Advisors with any questions. In the meantime, keep an eye out for part two of this two-part blog post for more information!

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