The Internal Revenue Service recently issued Notice 2023-54, in which they waived the excise tax on 2023 required minimum distribution failures committed by designated beneficiaries. This extends the waiver already provided for 2021 and 2022 under Notice 2022-53. When advising taxpayers of these waivers, advisors must ensure they fit the narrowly defined benefiting class of beneficiaries. Taxpayers who don’t qualify but try to take advantage of these waivers might find that they owe the IRS excise tax that applies to RMD shortfalls.
RMDs and the Excise Tax On Excess Accumulation
Like owners of individual retirement accounts, beneficiaries will owe the IRS excise tax on any RMDs not taken (distributed) by the applicable deadline. For a beneficiary, RMD obligations are determined by multiple factors, including whether the beneficiary is a designated beneficiary, an eligible designated beneficiary or a non-designated beneficiary. The age of the IRA owner at death and whether the IRA owner died after 2019 the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) Act 1.0 became effective are also determining factors.
The recently issued IRS Notice 2023-54 focuses only on designated beneficiaries who inherited IRAs (not including Roth IRAs) after 2019, and the owner died on or after the date they were supposed to start taking RMDs. Designated beneficiaries are individuals and qualified see-through trusts who don’t qualify as eligible designated beneficiaries.
While a designated beneficiary who inherits an IRA after 2019 must distribute it by the end of the 10th year after the owner’s death, annual beneficiary-RMDs are also required if the owner died on or after their required beginning date. The RBD is April 1 of the year that follows the year for which an IRA owner must take their first RMD. This first RMD year is age 70 1/2, 72, 73 or 75 depending on when the IRA owner was born.
Example 1: Jim inherited a traditional IRA from his 50-year-old mother, who died in 2020. Jim is a designated beneficiary who isn’t an eligible designated beneficiary.
Because Jim's mother died before her RBD, Jim doesn’t have an RMD until 2030 (distributions are optional until then) and must take a full distribution of whatever balance remains in 2030 (the 10th year).
Example 2: Sally inherited a traditional IRA from her 80-year-old mother, who died in 2020. Sally is a designated beneficiary who isn’t an eligible designated beneficiary.
Because Sally's mother died after the RBD and therefore had already started RMDs, Sally must take annual beneficiary RMDs beginning in 2021. Sally must also take a full distribution of whatever balance remains in 2030 (the 10th year).
SECURE Act 1.0 Confusion
The language in SECURE Act 1.0 indicated that annual RMDs weren’t required for designated beneficiaries during the first nine years, regardless of the age at which the IRA owner dies. The proposed regulations for SECURE Act 1.0 clarified that if the IRA owner was in RMD status at the time of their death, the beneficiary must continue taking annual RMDs. These beneficiary RMDs would be based on the beneficiary's RMD profile.
The IRS' Solution
In response to complaints during the comment period for the proposed RMD regulations, the IRS published Notice 2022-53, in which they waived the 50% excise tax on RMD failures for designated beneficiaries who inherited traditional IRAs in 2020 and 2021 and were required to take annual RMDs- as in Example 2 above. IRS notice 2023-54 extends this provision by one year, meaning the excise tax (reduced to 25% as of 2023) is automatically waived for 2021, 2022 and 2023.
RMDs: Waiver and Catch-up?
Common questions arising from this waiver include:
- Is this an RMD waiver?
Answer: No. The excise tax is waived. But, unlike 2022, when the IRS waived RMDs for IRAs and defined contribution plans, this isn’t a waiver of the RMDs. However, unlike other RMDs where an excise tax would apply if they weren’t taken, the excise tax is waived for designated beneficiaries for 2021, 2022 and 2023.
- Will a designated beneficiary be required to play catch-up and take the 2021, 2022 and/or 2023 RMD in 2024?
- Does this extend the 10-year period?
Answer: No. The deadline for fully distributing the IRA is still the 10th year after the owner’s death.
Getting an automatic waiver of the excise tax is a welcome convenience. Unlike other RMD failures, which require filing Form 5329, these waivers are automatic and don’t require filing Form 5329.
The question for tax advisors is whether their covered clients should take RMDs for 2023, considering that the account still has to be distributed in the 10th year. Not taking the RMDs for the covered years would mean bunching up distribution amounts over the remainder of the 10-year period, and advisors should consider the tax impact of doing so.