RMDs and the 3-Year Statute of Limitations

Take-Away: There is now a three year statute of limitations associated with the failure to take a required minimum distribution (RMD) from a retirement account.

Background: The SECURE Act 2.0 changed the penalties imposed on the failure to take a required minimum distribution (RMD). In the past, the penalty imposed on the failure to take such a distribution was 50% of the amount that should have been taken as an RMD. The SECURE Act 2.0 changed the amount of the penalty. Now, if the account owner, or beneficiary, fails to take an RMD, the penalty amount has been reduced to 25% for each year that the RMD is not taken, and if that error is corrected within two years, the penalty is further reduced to only 10%. In addition, the IRS can waive the entire penalty if there is good cause. An example of a waiver situation is when the RMD is not taken by the account owner in the year-of-death, if the decedent’s ‘last’ RMD is then taken by the designated beneficiary’s tax filing deadline, including extensions.

Statute of Limitations: Overlooked when the SECURE Act 2.0 was enacted was Section 313 of the Act which added a 3-year statute of limitation for the failure to take an RMD. If an RMD is missed, the 25% penalty is only applicable for the next three years. Apparently, if the three years pass, the penalty amounts then disappear, applying a liberal interpretation of the rule.

Example: Jonathan inherited an IRA from his brother Roger in 2018. Jonathan was supposed to start taking annual RMDs in 2019, but he has failed to do so since his brother’s death. Prior to the SECURE Act 2.0 Jonathan was subject to a potential 50% penalty for every year that he failed to take an RMD. Now, under the SECURE Act 2.0, Jonathan will only be concerned about missing the prior three years for his failure to take an RMD, i.e., 2020, 2021, and 2022. And because the CARES Act waived all RMDs for 2020, Jonathan’s exposure to the penalty will only be for two years, 2021 and 2022.

Ambiguity. Note that I earlier used the word apparently. The language used in Section 313 is not all that clear. It is possible that the IRS when it publishes its Regulations with regard to the SECURE Act 2.0, which was passed in December of 2022, it will interpret this 3-year statute of limitations as only applying to future years in which no RMD was taken. So caution is used when advising an individual who failed to take RMDs in the past.

Conclusion: This 3-year statute of limitations provision is yet one more reason why we anxiously await proposed Regulations from the IRS with respect to how the SECURE Act 2.0 will be interpreted. There are several other provisions in the Act that need a lot of clarification.