Wolters Kluwer Tax & Accounting explores required minimum distribution and other retirement plan changes effective in the U.S. this year

Wolters Kluwer (EURONEXT: WKL):

What: Many Americans may be unaware that they could be facing a deadline to correct mischaracterized required minimum distributions (“RMDs”) on some retirement plans as early as September 30, 2023. That’s according to experts at Wolters Kluwer Tax & Accounting (TAA) who are on hand to discuss the changes due to legislation called the Secure Act 2.0, passed on December 29, 2022.

The Secure 2.0 Act is an addition to the enactment of the Secure Act in December 2019, which had also imposed a variety of related retirement plan changes. This legislation introduced significant changes to retirement plans including rules altering the age for RMDs, among other guidelines that impact retirement accounts and subsequently personal finances.

Due to the legislation passing at year-end 2022, being effective January 2023, the Internal Revenue Service (IRS) has received feedback from retirement plan administrators that they have not had enough time to properly adjust their systems to comply with the new requirements. The IRS has also been advised that many recipients of inherited Individual Retirement Accounts (IRAs) were not aware the RMDs were to be made ratably over the 10-year distribution period and had already missed some distributions when the IRS guidance requiring ratable distributions was issued. The IRS has, therefore, issued further clarifying guidance to address these issues.

Why:

1. September 30, 2023 is the deadline to rollover mischaracterized required minimum distributions and avoid current taxation for people aged 72.
2. Penalty relief is available for certain inherited IRA recipients who failed to make required minimum distributions in 2021, 2022, and 2023.
3. Starting in 2023, lower penalties apply for persons who failed to take required minimum distributions.

Expert Voice: Mark Luscombe, JD, LL.M, CPA, Principal Analyst for Wolters Kluwer TAA, is available to discuss the immediate and longer-term impact of these retirement plan changes.

Details: The Secure 2.0 legislation and IRS guidance has changed RMD requirements for IRAs in several ways. Taxpayers and their advisors need to be aware of these changes to avoid possible penalties for failure to take required distributions. Recipients of mischaracterized RMDs may be unaware that their right to rollover those distributions and avoid taxation expires on September 30, 2023.

1. Mischaracterized Required Minimum Distributions

1. The required age for beginning RMDs was increased from 72 to 73, and IRA owners are no longer required to begin taking RMDs at age 72.
2. Given these age-based changes, plan administrators may have mischaracterized clients’ distributions in early 2023 as RMDs.
3. The IRS is permitting impacted taxpayers who received a mischaracterized single-sum distribution from their retirement account(s) between January 1, 2023 and July 31, 2023 an extended rollover period that ends September 30, 2023.

2. Beneficiary Required Minimum Distributions

1. Non-spousal beneficiaries not entitled to use the lifetime or life expectancy payment exceptions for an inherited IRA now must begin taking RMDs ratably over a 10-year period beginning in the year of the IRA owner’s death.
2. This nullifies the beneficiary’s ability to refrain from receiving distributions until the 10^th year when the original IRA owner had commenced IRA distributions during lifetime. Many taxpayers and tax advisors had assumed that the distributions could be taken in the 10^th year and had failed to take RMDs in 2020 and 2021.
3. The IRS is now providing penalty relief for failure to make required RMDs for 2021, 2022, and 2023 for IRA owners who died in 2020, 2021, or 2022.

3. Lower Penalties

1. Starting in 2023, the penalty for failure to take RMDs has been lowered to 25 percent from 50 percent, with a possible reduction to 10 percent if corrective action is taken within two years after the year of the missed RMD.
2. The IRS has indicated that it will continue to consider requests for waiver of the penalty for reasonable cause shown.

Contact: To arrange interviews with Mark Luscombe or other federal and state tax experts from Wolters Kluwer TAA on this or any other tax-related topics, please contact Shannon Wherry.

Wolters Kluwer TAA enables tax and accounting professionals and businesses of all sizes to drive productivity, navigate change, and deliver better outcomes.

About Wolters Kluwer

Wolters Kluwer (EURONEXT: WKL) is a global leader in information, software, and services for professionals in healthcare, tax and accounting, financial and corporate compliance, legal and regulatory, and corporate performance and ESG. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services.

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