Did you turn 72 years old in 2023 and receive a distribution from your traditional IRA? If so, you might be surprised to learn it might not actually be a required minimum distribution (RMD) after all, and that could save you some tax dollars.
Here’s why: In late 2022, the SECURE 2.0 Act changed the rules for RMDs. Previously, individuals reaching age 72 in 2023 would have had to start taking RMDs by April 1, 2024. However, the new law gives them a grace period. The first RMD for those reaching 72 in 2023 isn’t due until April 1, 2025.
What does this mean for you? If you received a distribution in 2023 and were told it was your RMD, there’s a chance it was actually a mistake. The IRS considers these distributions to be “mischaracterized” because they weren’t actually required by law.
Rolling Back the Mischaracterized Distribution: A Tax-Saving Opportunity
This mischaracterization actually presents a valuable opportunity. Since regular RMDs can’t be rolled back into an IRA, the IRS allows you to treat these mischaracterized distributions as rollovers. This means you can redeposit the funds into your IRA and avoid paying taxes on them in 2023.
Here’s the key: You need to act fast. Normally, you only have 60 days from the distribution date to complete a rollover. However, the IRS recognized the unusual situation and extended the deadline for these mischaracterized distributions. IRA owners and their surviving spouses have until September 30, 2023 to make a rollover.
Important Details to Remember About Mischaracterized Distribution Rollovers
- One-Time Exception: The extended 60-day window applies specifically to these mischaracterized distributions due to the SECURE 2.0 Act changes. The standard 60-day window applies to all other rollovers.
- Waiting Period Doesn’t Apply: Typically, there’s a 12-month waiting period between IRA rollovers. This waiting period is waived for mischaracterized distribution rollovers. However, if you take advantage of this exception, you won’t be able to perform another IRA rollover for the next 12 months.
Taking Action: What to Do Next
If you received a distribution from your IRA in 2023 and were told it was your RMD, here’s what to do:
- Contact your IRA custodian. Explain the situation and inquire about the possibility of treating the distribution as a rollover under the IRS guidelines for mischaracterized RMDs.
- Act before September 30, 2023. The extended deadline provides a valuable window to avoid taxes on the distribution. Don’t miss this opportunity!
Remember, We’re Here to Help
IRA rules can be complex, and navigating these changes can be confusing. If you have any questions about mischaracterized distributions, rollovers, or your IRA in general, contact our office. We’re here to help ensure your retirement savings plan works for you.
