The required minimum distribution (RMD) rules are probably one of the most confusing rules impacting millions of Americans each year. The IRS has not made things easier by repeatedly changing how the rules work in the form of long and often confusing revenue rulings and proposed regulations. This following will explain the basics of the RMD regime and focus on the current rules impacting non-spouse inherited Self-Directed IRAs with respect to RMD distributions.

RMD Basics

In general, the IRS compels pretax Self-Directed IRA owners to withdraw a percentage of their tax-deferred savings each year, starting at age 73 or after inheriting any IRA account from a non-spouse. The IRS created the RMD regime to limit the ability of Americans to generate dynasty tax-deferred or tax-free wealth.  Note – the RMD rules for IRAs and Self-Directed IRAs are the same.

A Roth IRA owner is not subject to the RMD regime; however, a non-spouse beneficiary would be subject to the RMD rules. Designated Roth accounts in a 401(k) are subject to the RMD rules for 2022 and 2023. However, for 2024 and beyond, RMDs are no longer required from Roth 401(k) accounts.

In sum, the RMD is the minimum amount one must withdraw from an IRA each year. It’s important to note that one can always withdraw more than the minimum required amount. However, RMDs are taxable and treated as income subject to tax on IRS Form 1040.

In the case of the death of the Self-Directed IRA or Roth IRA owner, if the deceased spouse if the sole beneficiary of the IRA, then the surviving spouse would have the option to treat the IRA as his or her own, subject to the RMD age based on the surviving spouse’s age. It is important to remember that there are very specific and relevant rules that impact non-spouse inherited IRAs, which will be the main focus of this article.

RMD Rules if You Reach the Age 72/73 in 2023

The timing of taking one’s first RMD is based on the age of the Self-Directed IRA owner. After SECURE Act 2.0, individuals turning age 73 in 2023 will need to take their first RMD distribution this year or by April 1 of the following year The Act, which was signed in law in December 2022, raised the age at which RMDs must start to 73 from 72, beginning in 2023. However, because the SECURE Act was enacted so late in 2022, there was uncertainty regarding the required beginning date for RMDs for those reaching age 72 in 2023.

Many IRA owners turning 72 in 2023 would be under the impression that they would have to take RMDs in 2023, because the age change to 73 happened so late in 2022. As a result, because the IRS was so unorganized and untimely in announcing the new RMD age, IRA owners who turn age 72 in 2023 do not have to commence taking their RMDs this year. Note – IRA owners that turned 72 in 2022 are still required to take RMDs.

To try to help Self-Directed IRA owners who were 72 and already took RMD in 2023, The IRS recently released Notice 2023-54 extending the 60-day rollover period for IRAs and extending the time that those who took RMDs from IRAs to return that money to their accounts or reclassify the distribution as a rollover until September 30, 2023.

Inherited IRAs and RMDs in 2023

An inherited Self-Directed IRA or Roth IRA occurs when the beneficiary of the deceased IRA is a non-spouse, such as a child, sibling, etc. Prior to the original SECURE Act, which was passed in December 2019, a beneficiary of an inherited IRA had an opportunity to “stretch” the RMD over their life expectancy, using a table provided by the IRS annually.  However, the Act essentially ended the stretch IRA option and required most non-spouse IRA beneficiaries to take RMDs over a ten year period. Essentially, if you inherited an IRA, you must deplete the entire account before the ten years are up.

This is where the story gets interesting. Since the SECURE Act was passed in December 2019, the IRS has spent the last three years attempting to come up with final rules on how the RMD rules will work for non-spouse inherited IRAs.  Unfortunately, the IRS is still working on finalizing the rules, as there is still uncertainty as to timing requited to take the RMD in the ten-year period. 

How a non-spouse beneficiary would need to take RMDs over this ten-year period has been a major cause of misunderstanding. At first, the thought was that the beneficiary could wait until the very end to withdraw from the plan. This would allow unhindered tax-free growth of the plan funds.

However, the IRS then announced in proposed regulations that if the original IRA owner had died after his or her required beginning date, the beneficiary would need to take RMDs on the inherited IRA in years one through nine. In other words, the RMDs would have to be taken pro rata over the ten-year period.

Because of all of this confusion, the IRS has since indicated that there will be no penalties for RMDs not taken in 2021 or 2022. On top of that, in the summer of 2023, the IRS announced that there will be no RMD requirement for 2023, either.

The requirement to fully distribute the inherited IRA account over the ten-year time period is still in place, although, no one really knows exactly if or when the RMD requirement will be implemented and enforced. The understanding is that inherited Roth IRA non-spousal beneficiaries seem to be able to wait until the final year to deplete the inherited Roth IRA, yet, it is still unclear how the rule will apply to pretax IRAs (pro rata over the ten years vs. wait until the final year).

Penalties for failing to properly take annual RMDs are still high, even after Congress recently lowered the missed withdrawal penalty to 25% of the value of the withdrawal. This fine can be lowered to 10% if the mistake is fixed before the date that the penalty is imposed.

End of Roth 401(k) RMDs 2024

Beginning in 2024, there will be no RMDs for designated Roth accounts in a 401(k) plan. This will put these accounts on par with Roth IRAs when it comes to RMDs. While these withdrawals were not taxable if certain requirements were met, those with money in a Roth 401(k) were still forced to take a withdrawal or to roll these accounts over to a Roth IRA to preserve the tax-free nature of these funds.

Conclusion

The RMD rules for non-spousal inherited IRAs are still in a state of flux. The age of RMD has been increased from 72 to 73 for 2023. However, for inherited IRAs where the IRA owner died after December 31, 2019, the ten-year distribution rule would apply, although it is still unclear whether the RMDs must be made pro rata throughout the ten years or can be taken in the final year, although it would seem that inherited Roth IRAs can wait until the final year to deplete the plan.

Because of all of this confusion, the IRS has since indicated that there will be no penalties for RMDs not taken between 2021 and 2023. Although, the inherited IRA holder would still need to deplete the IRA over ten years, which can lead to some messy tax implications for some taxpayers waiting until year ten to take a full pretax RMD distribution.  Looking ahead, we can expect the IRS to finally clarify how the ten-year non-spousal inherited IRA RMD rules will work by the end of 2023.