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George F. Bearup, J.D. Senior Legal Trust Advisor

November 15, 2022

2023 RMDs for those who Received RMD Relief

Take-Away: While the IRS recently waived the 50% excise tax for some, but clearly not all, beneficiaries who inherited an IRA after the SECURE Act, the calculation of the next required minimum distribution from that inherited IRA, starting in 2023, will require some calculations.

Background: As was previously reported (admittedly, several times by me)  the IRS reported in its IRS Notice 2022-53 issued earlier this fall that it would waive the 50% excise tax for a designated beneficiary’s failure to take a required minimum distribution (RMD) from an inherited IRA when the IRA owner died after his or her required beginning date (RBD) of age 72. The IRS’s waiver was only for those beneficiaries who failed to take an RMD for 2021 and 2022 from an inherited IRA account owned by someone over the age 72 years. Thus, if an eligible designated beneficiary did not take an annual RMD in those years, then he/she may still be subject to the excise tax.

Obligation to Take 2022 RMD?: While the Notice is not abundantly clear on this point, it appears that the designated beneficiary will not be required to take RMDs for the two years that the ‘penalty’ waiver applies. [Note, that this conclusion might change when the IRS gets around to publishing its Final SECURE Act Regulations, so proceed with some peril.]

End of the Grace Period: This grace period with relief from the 50% excise tax will come to a close in 2023. Consequently, even when a beneficiary has benefited from the IRS’s waiver of the excise tax for the failure to take a required minimum distribution (RMD), that beneficiary will still be subject to the 50% excise tax if they do not take their 2023 RMD from the inherited IRA by December 31, 2023.

Calculation Confusion: How the 2023 RMD (and presumably all future RMDs) will be calculated if the designated beneficiary did not take annual RMDs for 2021  (for an account owner’s 2020 death) or for 2022 (for an account owner’s 2021 death) has caused for some beneficiaries a bit of confusion. Basically two steps are involved.

Step #1: The SECURE Act’s 10-year payout period remains the same, so that it will still end on December 31 of the year of the 10-year anniversary of the original IRA account owner’s death. The inherited IRA must be emptied by the designated beneficiary by that date.

Step #2: The designated beneficiary’s 2023 RMD will be determined using a life expectancy as if their RMD for 2021 and 2022 were, in fact, taken- even if those RMDs were not actually taken by the beneficiary in those calendar years.

Example: Anne died in 2020 at age 82. Anne left her traditional IRA to her son Benny, age 55. Benny is a non-eligible designated beneficiary. Consequently, Benny is subject to the SECURE Act’s 10-year payout rule. Obviously, Anne died after her required beginning date (RBD) of age 72. Without the recent IRS Notice, Benny would have been subject to a 50% penalty if he did not take an RMD for 2021, i.e. the first year of his 10-year distribution period from the inherited IRA. Benny would also face a 50% penalty if he does not take his 2022 RMD, i.e. the second year of the 10-year payout term. The IRS’s Notice indicates that it will waive Benny’s penalty if he failed to take RMDs for 2021 and 2022.

  • Benny does not take RMDs for either 2021 or 2022 believing that he did not have to, until that is the IRS published its Proposed SECURE Act Regulations, which told Benny that he was required to take annual RMDs because Anne was over her RBD at the time of her death.
  • Benny’s payout period with respect to the inherited IRA  will remain the same, so that he must still empty the inherited IRA by December 31, 2030 (10th anniversary of Anne’s death.)
  • Benny must take annual RMDs from the inherited IRA for years 3 through 9 of the 10-year distribution period, starting in 2023.
  • Benny’s 2023 RMD will be calculated as if he did, in fact,  take the 2021 and 2022 RMDs, even though he did not take a distribution from the inherited IRA  in either calendar year.
  • Benny’s 2021 RMD would have been the December 31, 2020 IRA balance divided by 28.7, which is the life expectancy of a 56-year old under the prior IRS Single Life Expectancy Table.
  • Benny’s 2022 RMD would have been the December 31, 2021 IRA balance divided by 29.6, which is the life expectancy of a 56 year-old under the new (starting in 2022) Single Life Expectancy Table, 30.6 years, and subtracting one  (1) from that number.
  • Benny’s 2023 RMD will be the December 31, 2022 IRA balance divided by 28.6, the life expectancy that would have applied for 2022, subtracted by one (1), which is required to identify the ‘divisor’ for each subsequent year to calculate the beneficiary’s RMD for the next year.
  • For 2024, Benny’s 27.6 life expectancy will be used as the divisor for his 2024 RMD which must be taken by him (28.6 years less 1 = 27.6 years.)
  • The fact that Benny failed to actually take an RMD for both 2021 and 2022 will be ignored.

Conclusion: Ignoring the income tax cost of bunching taxable  income of two RMDs into a shorter period of time, there is no need for a designated beneficiary who inherits from an IRA owner who was older than his/her RBD at the time of death to take RMDs for 2021 and 2022. Moreover the penalty that normally would apply for the failure to take a required minimum distribution will be waived, but only for calendar years 2021 and 2022. Practically speaking, the beneficiary’s failure to take those two years of RMDs will be ignored. Come 2023 though, RMDs will be required to be taken from an inherited IRA, and the failure to do so will also trigger the 50% excise tax for that failure.