Take-Away: For those beneficiaries who inherited a retirement account from an owner who was beyond his/her required beginning date at the time of their death, the IRS just provided another year of waiving their annual required minimum distribution.

Apologies in Advance: This missive is jammed full of acronyms, e.g. RBD, RMD, NEDB, etc. in an effort to keep it short.

  • RBD – Required beginning date when a retirement account owner must begin to take taxable distributions from their retirement account, April 1 of the year following attaining age 73 (under the SECURE Act 2.0.)
  • RMD – Required minimum distributions that must be taken by the account owner, or by a beneficiary who inherits from a retirement account owner. The distribution rules turn on the age of the retirement account owner, when he/she dies, and the relationship of the designated beneficiary to the account owner.
  • EDB – An eligible designated beneficiary is one who is either a spouse of the deceased account owner, a disabled beneficiary, a chronically ill beneficiary, a minor child of the deceased account owner, or one who is less than 10 years younger than the deceased account owner. All of these eligible designated beneficiaries are entitled to take distributions from the inherited retirement account over their life expectancy, i.e. an annual stretch distribution using their own life expectancy to calculate their annual RMD.
  • NEDB – An individual who is named as the beneficiary of a retirement account but who does not fit within one of the five categories of eligible designated beneficiaries.

Background: In a recent Notice the IRS extended the annual required minimum distribution (RMD) for some retirement account beneficiaries for a year. If an IRA beneficiary who is subject to the SECURE Act’s 10-year distribution rule would have had to take a 2023 required minimum distribution (RMD), the IRS now says that it will excuse that 2023 RMD. How we got here is worth a quick revisit to the history of the SECURE Act and its Proposed Regulations.

Short History: Assume a non-spouse designated beneficiary of an IRA whose owner died in 2020 or later. Under the prior law, that beneficiary could stretch their required minimum distributions (RMDs) over their lifetime from the inherited IRA. Then along comes the 2019 SECURE Act -so much for stretch distributions.

SECURE Act: Under the SECURE Act this non-spouse designated beneficiary, called a non-eligible designated beneficiary under the Act, or NEDB for short, became subject to the SECURE Act’s 10-year distribution rule, thus no longer was the lifetime stretch distribution available to the beneficiary. The SECURE Act with its new 10-year distribution rule became effective on January 1, 2020.

Proposed Regulations: The SECURE Act’s Proposed Regulations, published in February, 2022, surprised us with yet another change. In addition to the 10-year distribution period for most NEDB, annual required minimum distributions (RMDs) would be required in years 1 through 9 of the 10-year distribution period for those NEDBs if the IRA owner died after his/her required beginning date (RBD), i.e. April 1 of the year after the IRA owner turns age 73. Thus, under the Proposed Regulations, NEDBs of retirement account owners who died in 2020 after their RBD should have taken their initial (first) RMD in 2021 (year 1 of the 10-year distribution period) even though no one suspected that it was necessary to take annual distributions until February 2022 when the Proposed Regulations were first made public.

Foul! The reaction to the Proposed Regulations that require an annual RMD for some NEDBs, but not others, triggered a loud howl, when no one suspected the requirement of an annual RMD until 14 months after the SECURE Act was enacted. In response, the IRS in October 2022 published its Notice 2022-53 in which it announced that it would excuse RMDs for any NEDBs who missed their 2021 RMD obligation. In that same Notice the IRS also relieved NEDBs from their missed RMDs for retirement account owners who died in 2022 after their RBD.

2023 Notice: Now, in Notice 2023-54, (July 14, 2023) the IRS adds yet another year of relief to some NEDBs by waiving the 2023 RMD for NEDBs of retirement account owners who died in 2020 or 2021 after the owner’s RBD. It also excuses 2023 RMDs for NEDBs of retirement account owners who died in 2022 after their RBD. In short, the first three years (1,2 and 3) of annual required minimum distributions (2021, 2022, and 2023) are now waived. By way of example, if a NEDB inherited in 2021 from an IRA owner who died after his/her RBD, the NEDB’s first 2 years of RMDs (2022 and 2023) are waived. If the NEDB inherited in 2022 from such an IRA owner, i.e., one who was older than his/her RMD, the first year of RMDs (2023) is also waived.

Observation: The waiver of a year of an otherwise RMD does not mean that the 10-year distribution period is simply pushed back, and starts a ‘new’ 10-year distribution period once the waiver period has passed. Rather, the waiver of an annual RMD for 3 years simply means that the balance of the inherited retirement account will then be spread over 7 years of distributions, perhaps in larger amounts thus maybe exposing those annual RMDs to higher marginal federal income tax brackets.

Conclusion: While it is nice to see the IRS respond with Notices to waive an annual required minimum distribution for some designated beneficiaries, the use of annual Notices to address the disconnect between the SECURE Act and the Regulations demonstrates how little thought went into these changes imposed by Congress in its lust for more income tax revenues. Nor does the recent Notice explain that for an Act that became effective on January 1, 2020, we are still waiting (in July 2023) for Final Regulations to implement that tax legislation that impacts millions of Americans who inherit retirement accounts. Not to mention that we have yet to receive Proposed Regulations to implement the SECURE Act 2.0 and its multiple changes, leaving many of us to wonder what new surprises the IRS has in store for us when those Proposed Regulations finally get published.