Taxes don’t just go away because it’s not April. This summer was a busy one for the tax code. If you thought our friends at the Internal Revenue Service took the summer off to give their calculators a break, you would be incorrect. It was a busy one for updates, here’s what we learned:
It happened again! We got another update from the IRS, and they have decided to delay the requirement for inheritors of Traditional IRAs when the original owner died after December 31, 2019 to take annual required minimum distributions. Previously, the IRS had come out with an update where they stated that the 10-year rule for inherited IRAs did have an annual required minimum distribution requirement. Since this was not clear from how it was originally written and distributed, the IRS waived the need to take these RMDs for 2021 and 2022. In summer 2023, we got the same update that the RMDs for this year are also not required. We are keeping a close eye on this rule and will update affected clients as this continues to change.
We are not done with summer updates about RMDs, but this one is for account owners. The required beginning age has been moved until age 73. As advisors, we met with some clients who turned age 72 in the beginning of the year, and satisfied their RMD requirement already. There is relief for these taxpayers who were thinking ahead and already satisfied their first RMD in 2023. IRA owners are allowed to rollover the amount they took out of their IRA for their RMD until September 30, 2023 if they turned 72 this year. If they withheld any taxes from the RMD, they will be able to recoup that money on their 2023 tax return.
Thanks to our resources here at Baird, we are constantly learning new information about Secure Act 2.0. The exception to the early withdrawal penalty has been expanded to more groups of people. If someone was to withdraw retirement monies from an IRA before age 59.5, in most cases they are subject to ordinary income tax plus an early withdrawal penalty of 10%. Historically this 10% penalty could be waived up to certain limits for a first-time home purchase, disability costs or higher education costs. Beginning in 2024, the list has expanded to include victims of domestic abuse, terminally ill employees, withdrawals made after a federally declared disaster and to cover personal family emergencies. There are nitty gritty details with these new exemptions, so if you are considering a withdrawal talk to myself, Bill or Corey.
As we head into the end of the year, we will keep our eyes peeled for tax law as it continues to change. As always, reach out to us if you want to talk about your unique situation.