Written by: John Munley
Out of all of President Trump’s colorful tweets recently, the one that caught our attention was a rather boring one relating to retirement, because we LOVE this stuff! While boring, if passed this could have a direct effect on how you live after 70 ½.
This summer President Trump signed an executive order for Treasury & Labor Departments to review ways to make small employer retirement plans more affordable and accessible in addition to extending and/or pushing back the Required Minimum Distribution (RMD) requirements.
In this edition, we’d like to focus on the RMD requirements and why this matters to you and making it through retirement.
What is a Required Minimum Distribution?
Broadly, a RMD is a Federal regulation that forces you to withdraw from your qualified retirement plans (IRA, 401(k), 403(b), 457) once you reach age 70 ½. There are situations where one may not have to take withdrawals, for instance if you are 70 ½ and still working with the employer that houses your 401(k). In the end it can be complicated, and for that we recommend consulting a financial planner, even better, a financial planner that does taxes. If you don’t have a financial planner, click here for a virtual consult.
Why Trump wants to change the RMD rules
Right now, if you’re 70 ½ and older but don’t need to access the money from your IRA yet the current RMD rules penalize you but if Trump’s exec order goes through, that could change. Between pensions, social security and after-tax investments, you might not need to withdraw from your IRAs to meet your expense needs. Since the government now requires you to take out pre-tax money, it means that your April tax bill increases. If my taxes increased on income I was forced to take, I wouldn’t be too happy about it either.
On the other hand, the government has given you tax-deferred growth for, most likely, decades before you have reached 70 ½. If you started with $50k in an IRA and it’s now worth $200k 20 years later, you haven’t paid a penny of tax on that $150k increase yet. So, the government politely 😉 asks for their tax money by requiring you to start withdrawing it.
Beyond the fact that this seems like an unfair policy to those who have earned and saved well, we’re living longer and therefore need our money to last longer. If you don’t need money from your qualified retirement accounts and are required to take it out, you have to pay taxes on those dollars; making it harder to plan and not outlive your assets. If the RMD requirements were reduced, then not only do you save money on the taxes you would have paid, but that tax money and the distribution itself will be able to continue to grow tax-deferred in the stock market – Yippie!
What those who want to keep the RMD the same are saying
Those who are against the change have three main objections:
- “It only helps the rich! Opponents to the change argue that those who don’t need to take money from their IRA’s in their 70’s are better off than those who need to in the first place. So why change the rule to favor them?
- If President Trump’s aim is to help those who are in financial trouble, the rule change won’t achieve it. The average American 55-64 years old has little or no retirement savings to begin with. This proposed change will do nothing to help them. Opponents say this is just another tax break for the wealthy.
- Opponents also argue that this move will hurt our Federal Government’s already pressing budget deficit and reduce much needed tax revenue.
Some perspective on how you position yourself on this proposed law
- If this bill goes into effect, then you will need to readjust your RMD plan going forward.
- If you adjust your RMD plan, your tax liability will change and you may need to update any withholding or estimated tax payments you have been commonly making.
- If you do not withdraw the appropriate amount from your IRAs as required, you could be facing a 50 percent penalty!
- If you still don’t want to withdraw the money and are charitably inclined – did you know that you can give your RMD to charity each year up to an amount of $100k per taxpayer and that amount is not taxable on your tax return. Consult a tax preparer on how to mark this appropriately on your 2018 tax return.
- We here at wHealth Advisors take care of all this for our clients – income tax projections so you know what you’re April tax bill will be the year before and proactive planning throughout the year prior to when your first Minimum Distribution is Required, how much to withhold, where to take it from, and how to donate and take the Qualified Charitable Distribution deduction on your tax return.
Regardless of what happens with Trump’s plan for RMD, your financial advisor can keep you on track to your life goals, now and in retirement.