RMD Relief? No Thank You!
Required Minimum Distributions (RMDs): IRS Updates & Tax Strategies
The IRS issued new guidance on required minimum distributions (RMDs), causing confusion among beneficiaries. Under the SECURE Act regulations, some individuals must take annual RMDs within the 10-year payout period. Recent IRS relief waives penalties for missed distributions, but delaying withdrawals could lead to larger tax burdens later.
IRS Extends RMD Penalty Relief - Notice 2023-54
To clarify RMD rules, the IRS issued Notice 2023-54, extending penalty relief for missed distributions.
- 2022 Relief: The IRS waived penalties for missed 2021 and 2022 RMDs under the 10-year rule.
- 2023 Extension: Beneficiaries of accounts inherited in 2020, 2021, or 2022 can skip 2023 RMDs without penalty.
Skipping RMDs may seem beneficial in the short term, but delaying withdrawals could result in higher taxes later.
Should You Skip the 2023 RMD?
Some beneficiaries might think skipping 2023 RMDs is a smart move. Avoiding an immediate tax bill seems like a clear benefit. However, deferring withdrawals could create higher taxable income in later years.
Under the SECURE Act, inherited retirement accounts must be fully distributed within 10 years. If beneficiaries delay withdrawals, larger distributions in the final years could push them into higher tax brackets.
Tax-Efficient Withdrawal Planning
Instead of skipping RMDs entirely, consider a flexible withdrawal strategy. Spreading distributions over multiple years could help reduce overall tax liability.
Example of Flexible RMD Planning
Debra, age 75, died in 2020. The beneficiary of her traditional IRA is her adult daughter, Brittany. Brittany is a non-eligible designated beneficiary subject to the 10-year rule under the SECURE Act. The proposed regulations say that because Debra died after her RBD, Brittany must take required minimum distribution based on her single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 said that if Brittany failed to do so for 2021 and 2022, there is no penalty on the missed RMDs. Notice 2023-54 extends this relief to the 2023 RMD.
Because Brittany is eligible for relief from the required minimum distributions during the 10-year period for years 2021, 2022, and 2023, she could take nothing in 2023 for a third year in a row. However, she may want to consider taking distributions anyway to minimize the tax hit in future years. Despite Notices 2022-53 and 2023-54, drawing down the inherited IRA throughout the 10-year period while being cognizant of current tax brackets could be a wise tax planning strategy.
Key Considerations for RMD Planning
- Understand the 10-Year Rule
- Inherited retirement accounts must be fully withdrawn within 10 years.
- Skipping withdrawals now may lead to higher taxes later.
- Evaluate Tax Brackets
- Taking smaller distributions over multiple years could reduce total tax liability.
- Large withdrawals at the end of the 10-year period could trigger higher tax rates.
- Consider Roth Conversions
- Converting traditional IRA funds to a Roth IRA spreads tax payments over time.
- Roth IRA withdrawals remain tax-free in retirement.
- Monitor IRS Guidance
- Future IRS updates may affect distribution requirements and tax penalties.
Frequently Asked Questions
Who qualifies for 2023 RMD penalty relief?
Beneficiaries of inherited retirement accounts when the original owner passed away in 2020, 2021, or 2022 can skip 2023 RMDs without penalty.
Do I still need to withdraw funds from an inherited IRA?
Yes, under the SECURE Act, the entire IRA must be withdrawn within 10 years. Skipping RMDs now could result in larger taxable distributions later.
What happens if I wait until the last year to withdraw funds?
A large withdrawal in year 10 could push you into a higher tax bracket, increasing the total tax paid.
Can I take voluntary distributions even if the IRS waived penalties?
Yes, taking smaller withdrawals now may reduce future tax burdens.
How do RMD rules differ for Roth IRAs?
- Roth IRA owners do not have RMDs.
- Inherited Roth IRAs must follow the 10-year rule, but withdrawals remain tax-free.
Plan Your RMD Strategy Wisely
While IRS relief allows skipping 2023 RMDs, delaying distributions may increase tax burdens later. Spreading withdrawals over multiple years helps manage tax liability and maximize retirement savings. Making the right decisions about required minimum distributions (RMDs) can significantly impact your long-term tax liability and retirement savings. A financial advisor can help you develop a tax-efficient withdrawal strategy that aligns with your financial goals.
To read more of our blog articles, click here.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
Source:
Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC