RMD Update…Again! Skip Your RMD?

In case you missed it, the IRS released updated guidelines last week regarding Required Minimum Distributions (RMD) from inherited retirement accounts. We view staying on top of rules like these as a responsibility to the feds we serve.

This new change applies to SECURE Act-impacted inherited accounts. If you’re not familiar with those rule, you can find them here. And if you want the new rules on “regular” RMDs, click here.

Previous guidelines suggested that if the decedent had already begun RMDs prior to death, the beneficiary would have to continue distributions as if the decedent were still alive.

Many people were getting this wrong, incorrectly assuming they just needed to have the account fully distributed by the 10th year of having inherited it. In response, the IRS released Notice 2023-54 stating that due to the continued confusion, they would waive the requirement for this year.

Actions You Should Take Next

The IRS is allowing people to forego this year’s distribution since we are already midway through the year, in order to allow families the time to plan appropriately.

Anyone who inherited an IRA or qualified retirement plan that has the following criteria will not have to take an RMD in 2023:

• The inheritor is not an eligible designated beneficiary (generally a non-spouse more than 10 years younger than the decedent, but there are other definitions as well)
• The decedent passed after 2019 (once the SECURE Act became effective)

That said, the first step to take is to determine if any of your assets fall under this rule. If they do, you should understand that just because the IRS is waiving the requirement for this year, this does not mean you should skip it. 

It is confusing to consider the future value of a current action. Higher taxes later, higher Social Security taxes later, higher Medicare costs, etc., could all befall a beneficiary based on when and how they take these withdrawals.

It’s important to understand that the entire account must still be empty by year 10 for inherited accounts under SECURE. As such, we utilize tax-bracket management strategies. If you make distributions this year as a beneficiary, at which rate will you pay taxes? If you’re still working and earning a salary, are you tax rates higher than they will be within that 10 year period?

What is your current tax rate relative to your future rate? This is where tax planning comes in. For our clients, we project their tax brackets especially for post-work years. Under the current TCJA law, tax brackets are set to be increased in a few years if no law changes are made.

Assuming your income stays the same between now and then, it may be more beneficial for you to take it out now while rates are lower rather than waiting. If you skip a year, you’ll have a slightly higher annual distribution which could be combined with higher rates in a few years. If you’re on the cusp of a new bracket, it could mean paying taxes at a whole new, higher bracket.

On the other hand, if you’re retiring shortly and your taxable income will be reduced, perhaps waiting to make distributions in the future when you have less taxable income could allow you to save on your tax liability. Just remember that if delaying by a year, you have less time to fully deplete the account, which likely means larger distributions in each year that fill up tax brackets faster.

What makes the most sense will be dependent on various factors making this decision extremely individualized, so make sure you plan carefully so that you make the best use of your wealth and the current laws.

If you’re interested in the details, or you need literature to help you fall asleep at night, you can find the IRS publication using this link.

And if you’d like more of our team’s thoughts, you can find them here.