There has been a lot of confusion in 2023 surrounding required minimum distributions (RMDs). This has largely been fueled by changes from the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act, which was passed in late 2022.
In addition, the original Secure Act changed the RMD rules for inherited IRAs in ways that the IRS has not yet definitively interpreted.
Your clients who may be affected by these situations need your help and guidance in dealing with them. Here are three common questions you can expect from clients, as well as other major issues surrounding RMDs where confusion may reign.
Do I Need to Take My RMD This Year?
Secure 2.0 raised the age at which RMDs must start to 73 from 72, starting in 2023. The law was enacted so late in the year — December 29, 2022 — that there was a great deal of confusion regarding the required beginning date for RMDs for those reaching age 72 in 2023.
Many folks who were turning 72 in 2023 thought they still needed to commence RMDs in 2023. A main source of this confusion was the fact that many plan sponsors and IRA custodians had already mailed out RMD notices to those turning 72 this year due to the late enactment of the new rules.
In March, the IRS set a deadline of April 28 for IRA custodians to notify account holders who will turn 72 in 2023 that they do not have to commence taking their RMDs this year.
If any of your clients were affected by this situation, they will need your guidance in deciding what to do if they have taken an unnecessary RMD.
Keep in mind that clients who turned 72 in 2022 are required to continue taking their RMDs. The same applies to any clients who were taking RMDs prior to 2023. Nothing has changed for them in terms of their RMD requirements.
I Turned 72 in 2023. Can I Return My RMD?
The IRS recently released Notice 2023-54 extending the 60-day rollover period for IRAs and extending the time that those who took RMDs from IRAs or other retirement accounts have to return that money to their accounts or reclassify the distribution as a rollover until Sept. 30.
In many cases, your clients may be able to put the money back in their IRA or into a 401(k) or other type of retirement plan account from where the RMD originated. Especially in the case of an employer plan, if they can't redeposit the erroneous RMD, their next best option may be to treat the money like a rollover and deposit it into an IRA by the Sept. 30 deadline.
One thing for clients to keep in mind is that if their RMD taken in error included the withholding of taxes, they must include the amounts withheld for taxes when putting the money back into their account. Otherwise, that money will be treated as a taxable distribution.
Should I Return RMDs Taken by Mistake?
Whether or not your client should return some of all of this money is a planning issue to work with your client on. There are a number of factors to consider.
- How large was the distribution?
- Does your client need the money?
- What is their tax situation? How will the extra taxes from the premature RMD affect them tax-wise this year?
The income from this unneeded RMD could push them into a higher level of Social Security taxation and may trigger a Medicare IRMAA surcharge two years from now.
On the other hand, if your clients finds themselves in a lower-than-normal tax bracket this year, perhaps they might keep some or all of the distribution, reducing RMDs in future years.
If they are in a higher tax bracket and able to itemize, they might use some or all of this money to make charitable contributions. Depending upon the size of the distribution, this could offer the chance to make significant contributions to one or more organizations. They might use this money to bundle several years' contributions into 2023 to allow them to itemize where they may otherwise not be in a position to do so. This could offset some or all of the tax hit from the unneeded RMD.
The best course of action for any non-required distributions will vary by client, and this should be considered as part of the planning you do for them this year.
