Last month, the IRS issued Notice 2022-53 seeking to clarify the rules concerning required minimum distributions (RMDs) for retirement plans under the SECURE Act.
Background
The SECURE Act was enacted in 2020 and made many changes to retirement plans such as 401(k)s and other defined-contribution plans (including traditional IRAs). For example, the law increased the age at which participants must being taking RMDs from 70.5 to 72 years, referred to as the required beginning date.
Most notably, the SECURE Act eliminated the old “stretch IRA” rule for designated beneficiaries of inherited retirement plans. The law implemented the new “10 Year Rule” which instead requires a designated beneficiary (as defined in Internal Revenue Code Section 401) to distribute the entire amount of an inherited retirement plan by the end of the 10th year after the original account owner’s death.
Despite the SECURE Act being enacted in 2020, the Department of the Treasury and the IRS have failed to release final regulations interpreting the new law. Accordingly, many practitioners have needed to follow their own interpretations. For instance, many practitioners believed that the 10 Year Rule allowed a designated beneficiary to wait until the 10th year to liquidate the inherited plan.
However, the IRS’s proposed regulations in February 2022 reached a different conclusion. The February proposed regulations instead suggest that a designated beneficiary of an inherited plan must begin taking RMDs starting the year after the participant’s death, whether the participant died before or after the required beginning date. Further, the proposed regulations provide that if an employee dies after RMDs have begun, the employee’s remaining interest must be distributed “at least as rapidly” as the distribution method used by the employee as of the date of the employee’s death.
Thus, the February proposed regulations provide that beneficiaries, subject to the new law, would need to begin taking RMDs in the year after death and cannot wait to take a lump sum in the last year before the 10-year period expires. This means affected beneficiaries should have taken RMDs in 2021 and 2022, and those that did not were technically not in compliance and would owe a 50% excise tax under Internal Revenue Code Section 4974.
IRS Notice 2022-53
As a result of this confusion, Notice 2022-53 was issued. The notice clarifies that the IRS intends to issue final regulations relating to RMDs that will apply no earlier than 2023. The notice also confirms that in the case of an employee who dies after the employee’s required beginning date with a designated beneficiary, annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.
To the extent a designated beneficiary did not take the specified RMD in 2021 or 2022, the IRS will not impose the 50% excise tax under Internal Revenue Code Section 4974. Additionally, if a taxpayer has already paid the excise tax for a missed RMD, the taxpayer can request a refund.
Conclusion
For years 2023 and on, affected taxpayers must be sure to follow the RMD rules outlined in the February proposed regulations and Notice 2022-53. While many more SECURE Act questions remain, the forthcoming final regulations should resolve the uncertainties that have been building over the last three years.
For more information or assistance regarding these regulations, please reach out to request a consultation, call us at 216-696-1422, or visit Kyle’s bio for his contact information to reach out to him directly.
