The IRS has issued new guidance providing transitional relief related to recent legislative changes to required minimum distributions (RMDs). In IRS Notice 2023-54, the IRS extended the deadline to September 30, 2023, for rollovers of distributions that were mischaracterized as RMDs due to the change in the required beginning date (RBD) from age 72 to age 73.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act raised the age at which retirement account holders must begin to take their RMDs. RBD for traditional IRAs and other qualified plans was raised from age 70½ to 72. In December 2022, the SECURE 2.0 Act increased the RBD age for RMDs to 73. It’s scheduled to rise to 75 in 2033.
The RBD is defined as April 1 of the calendar year following the year in which an individual reaches the applicable age. Therefore, an IRA owner who was born in 1951 will have an RBD of April 1, 2025, rather than April 1, 2024. The first distribution made to the IRA owner that will be treated as a taxable RMD will be a distribution made for 2024.
The delayed onset of RMDs has caused some confusion among retirees and necessitated updates to plan administrators’ automatic payment systems. For example, retirees who were born in 1951 and turn 72 this year may have initiated distributions early because they believed they needed to start taking RMDs by April 1, 2024.
Administrators and other payors also voiced concerns that the updates could take some time to implement. As a result, plan participants and IRA owners who would have been required to start receiving RMDs for calendar year 2023 before SECURE 2.0 (that is, those who reach age 72 in 2023) and who receive distributions in 2023 might have had those distributions mischaracterized as RMDs. RMDs are not eligible for a tax-free rollover to an eligible retirement plan, so the distributions would be includible in gross income for tax purposes.
The IRS Solution
To address these concerns, the IRS is extending the 60-day deadline for rollovers of distributions that were mischaracterized as RMDs due to the change in the RBD from age 72 to age 73. The deadline for rolling over such distributions made between January 1, 2023, and July 31, 2023, is now September 30, 2023.
The solution introduced in Notice 2023-54 may have implications for certain plan owners and administrators. See the following examples to better understand how the relief affects participants:
- If a plan participant born in 1951 received a single-sum distribution in January 2023, and part of it was treated as ineligible for a rollover because it was mischaracterized as an RMD, the plan participant will have until the end of September to roll over that portion of the distribution. If the deadline passes without the distribution being rolled over, the distribution will then be considered taxable income.
- The rollover applies to mischaracterized IRA distributions made to an IRA owner (or surviving spouse). It applies even if the owner or surviving spouse rolled over a distribution within the previous 12 months, although the subsequent rollover will preclude the owner or spouse from doing another rollover in the next 12 months. The individual could still make a direct trustee-to-trustee transfer.
- Plan administrators and payors won’t be penalized for failing to treat any distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) as an eligible rollover distribution if the distribution would’ve been an RMD before SECURE 2.0’s change to the RBD.
The IRS announced in the guidance that final regulations related to RMDs will apply for calendar years no sooner than 2024. We will monitor the situation and keep you informed of any updates when the IRS publishes the final regulations. If you have questions or would like more information, please contact your Janover professional or a member of the Janover team.