Taxpayers to Receive Transition Relief for RMDs

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IRS Offers Transition Relief for RMDs

IRS Adds Transition Relief for RMDs

There is ongoing confusion about required minimum distributions (RMDs). Therefore, the IRS has found it necessary to give limited transition relief to both IRA owners and beneficiaries. The SECURE 2.0 Act of 2022 included many changes in retirement planning. Starting in 2023, these changes take effect including moving up the age for RMDs to age 73. The first RMD will be due to be taken by April 1 in the first year and by Dec. 31 in subsequent years.

Required minimum distributions are the minimum amounts you must withdraw from your retirement accounts each year. People generally must start taking withdrawals from traditional IRA, SEP IRA, SIMPLE IRA and retirement plan accounts when reaching age 72. The age is 73 if you reach age 72 after December 31, 2022. Retirement plan account owners can delay taking their RMDs until the year they retire. This does not apple if they are a 5% owner of the business sponsoring the plan.

The IRS and the Treasury Department announced they intend to issue final regulations related to RMDs under Section 401(a)(9) of the Tax Code. It will apply no earlier than the 2024 distribution calendar year. They have issued Notice 2022-53. This stipulates that the minimum distribution rules for defined contribution plan balances (including IRAs) inherited from a beneficiary who had passed away after their required beginning date would not take effect until 2023 at the earliest. In reality, these rules will not be applicable until 2024 at the earliest.

Transition Relief Details in Notice 2022-53

Announced in Notice 2022-53, IRA owners who took these early RMDs (or will take them by July 31) will have until Sept. 30 to return those funds. Even though the normal 60-day period may have long passed. Under the tax rules, RMDs can never be rolled over. But these distributions aren’t RMDs, so they are eligible to be rolled over under this new guidance. The IRS says the rollback will be allowed. This applies even if an IRA-to-IRA or Roth IRA-to-Roth IRA rollover was done within the last 12 months. The once-per-year IRA rollover rule normally only allows one of these IRA-to-IRA rollovers per 365 days.

Additionally, the notice offers relief to people born in 1951 who, under the law prior to the enactment of the SECURE 2.0 Act, were told they would need to take RMD payments by April 1, 2024, since they would turn 72 this year.

Is this a Roth conversion opportunity?

RMDs can never be converted to Roth IRAs because RMDs can’t be rolled over, and a Roth conversion is a rollover. But since these mistaken distributions weren’t really RMDs, it appears the funds can be converted if the IRA owner is willing to pay the tax. The IRS does not specifically say this in the notice, but since the 60-day rollover deadline is extended, it’s likely that unwanted withdrawals can be converted to Roth IRAs, also up to the Sept. 30 deadline.

This may be a good planning opportunity for those wanting to take advantage of the current low tax rates before RMDs actually do kick in next year. Once RMDs begin, any Roth conversion will be more expensive tax-wise, since the RMD cannot be converted. The first dollars withdrawn from the IRA will be deemed to go toward the RMD. Once the RMD amount is satisfied, then any part or all of the remaining IRA balance can be converted. But it will cost more, since the RMD had to be taken first without the ability to convert it.