Greetings! I hope and trust that this finds you well and enjoying life.
Week before last President Trump proposed changes involving Required Minimum Distributions (RMDs) from IRAs. In a nutshell the proposal extends the age in which a retiree must begin to take withdrawals. This is a positive and favorable change that we can all celebrate. The following is relevant information on the proposal.
An executive order issued by President Donald Trump directing the Treasury Department to study easing the rules for required minimum distributions (RMDs) may not lead to new policies within the next six months, but changes could come faster if Congress takes up the cause.
The growing momentum in Washington to aid Americans’ retirement savings efforts could push the changes through one way or another, said Jamie Hopkins, director of the New York Life Center for Retirement Income at the American College of Financial Services.
While Treasury Department rulemaking is possible, legislation would be quicker, Hopkins said.
“Really what the EO does is direct Treasury to recalculate the life expectancy tables in the next six months, which could extend the age for RMDs,” Hopkins said.
“On one hand there is a natural understanding that people are living longer and you want to update life expectancy tables and extend them. That’s a perfectly reasonable idea,” said Hopkins. The tables have not been updates since 2002.
But extending out the age for mandated drawdowns won’t be without political controversy. “In reality, extending RMDs only serves to create a tax benefit for the wealthiest individuals who don’t want to spend down their account, he added.
“The only benefit is to allow more money to grow tax advantaged for Americans who don’t need money today,” Hopkins said. “The majority of Americans need to draw down their retirement assets to live and a third don’t even have any retirement savings, so it’s really only the top 10% of the country that would benefit,” Hopkins said.
Politics aside, a Treasury Department rulemaking to change actuarial tables will be time-consuming, likely taking 18 months to two years, even if fast-tracked. “So many products and companies would be impacted by the changes from employers and software companies to annuity, IRA and 401(k) providers. These companies will all want to be involved and comment on changes that impact their businesses,” Hopkins said.
A faster route to pushing RMDs out past the current required age of 70 and one-half is legislation, he said.
House Ways and Means Chairman Kevin Brady (R-TX) has signaled his desire to push forward with the bipartisan Retirement Enhancement and Savings Act (RESA) before midterm elections.
Changes to Treasury actuarial tables for calculating RMDs would need to be added to RESA, repeals the maximum age for traditional IRA contributions, increases access to 401(k) plan annuities and removes roadblocks to multi-employer retirement plans.
“There’s a better chance that RESA will be passed in the next six months than having Treasury do a traditional rulemaking that fast.” Hopkins said. “There seems to be growing support for RESA in DC. It is coming up more and more frequently in conversations. We could see a version of this move forward.
Traditional IRA owners who are subject to RMD rules are more likely than Roth IRA owners to take a withdrawal at age 71 or older, according to the study “How Required Minimum Distribution Rules Drive IRA Withdrawals (https://www.ebri.org/pdf/FF.314.IRAs.13Aug18.pdf) from the Employee Benefits Retirement Institute (EBRI).
Only 6.2 percent of Roth IRA owners age 71-79 took a withdrawal, compared with 85.4 percent of Traditional IRA owners, who are subject to the RMD rules, EBRI found. Also noteworthy, withdrawal amounts taken by those 71 or older are generally no greater than the RMD.
The executive order “creates more flexibility and efficient retirement distribution strategies that can impact investors and next generations significantly, said Ashley Folkes, a divisional vice president with AXA Advisors, Scottsdale, AZ.
“Extending the age for RMDs would allow many investors to manage and reduce their tax bills, invest longer and pass more or even all of their qualified money on to beneficiaries. This would significantly impact the way we advise clients,” Folkes said. “Right now withdrawals are taxed as regular ordinary income and RMDs often push clients into higher tax brackets, which can trigger a surtax on taxable income, higher taxes on Social Security benefits and Medicare high-income surcharges.”
Let’s keep our fingers crossed and hope this proposal by the Trump administration actually becomes law. If you have questions about the above or any retirement-related planning give us a call.
Best regards,
Jeff Christian CFP, CRPC
Fast is fine, but accuracy is everything.
Wyatt Earp