Last week, the IRS released IRS Notice 2023-23 to offer guidance for financial institutions that might have sent incorrect required minimum distribution (RMD) notices to traditional IRA owners becoming age 72 during 2023.
The incorrect RMD notices initially said that the traditional IRA owners must take their first traditional RMD for 2023, when they do not actually have to.
In order to learn how this error occurred in the first place, it is necessary to discuss a major change affecting traditional IRAs resulting from SECURE Act 2.0, passed into law by Congress in late December 2022.
This update increases the traditional IRA RMD age from age 72 to age 73. Remember that SECURE Act 1.0 (passed into law in late December 2019) raised the traditional IRA RMD age from 70.5 to 72 for traditional IRA owners born after June 30st, 1949. The SECURE Act 2.0 raised the RMD age to age 73 for traditional IRA owners born between January 1st, 1951 and December 31st, 1959.
An issue for some financial institutions (banks, credit unions and brokerages) who are traditional IRA custodians was that because SECURE Act 2.0 was enacted near the end of 2022 (December 29, 2022), therefore many financial institutions did not have time to update their systems before sending out incorrect RMD notices in early 2023.
On the topic of sending out RMD notices, the IRS requires financial institutions who are traditional IRA custodians to send a statement to traditional IRA owners who are subject to RMDs in a specific year.
For first-time traditional IRA RMD owners, the notice must inform the traditional IRA owner of the due date for their first traditional IRA RMD and the RMD amount.
Remember both federal employees and federal retirees are subject to the traditional IRA RMD rules. The traditional IRA RMD rules apply to both working and retired individuals who reach their “required beginning date” (RBD), being the date they must take their first RMD.
Given the late enactment of SECURE 2.0, some traditional IRA custodians may have sent notices to traditional IRA owners becoming age 72 during 2023 when in fact these individuals do not have to their first RMD during 2023.
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