Required Minimum Distribution Rules Could Change

by DAVID NOVAK

One of the things that seems to be endlessly irritating to most retired
clients I have worked with is being obligated to take Required Minimum Distribution, or RMDs, from their retirement accounts. It seems there is nothing like being forced to take money out of an investment account, and then having to pay taxes on the full amount, that gets their blood boiling.

As a refresher, under current tax law, anyone with a balance in an account that was funded with pretax dollars—most commonly a Traditional IRA or 401(k), but also including SEP IRAs, Simple IRAs, 403(b)s, and other similar accounts—is required to take a minimum amount of the account starting at age 70½. (Technically, one can delay the initial Required Minimum Distribution “RMD” until the year following 70½, but then would be required to take two RMDs in that year.)

The total gross amount of the Required Minimum Distribution is taxable income in the year in which it is taken out, and you have the ability to withhold some of this amount for taxes.

The distribution can take the form of cash and/or securities (although any amount withheld must be in cash). Basically, the government doesn’t care how you take the value out of your account, just so long as you do, and it can therefore be taxed.

There is a small possibility that this may change, based on an executive order issued in late August by President Trump. Part of the order was directing the Treasury Department to review current rules on RMDs, with one possible outcome
being revisions that change how RMDs are calculated. Some analysts have mentioned that it is possible that some combination of raising the age requirement to begin taking RMDs, and/or lowering the required distribution amount, eventually gets implemented.

One point I found interesting is that the life expectancy tables which the IRS uses to calculate RMDs have not been updated since 2002. The current RMD calculation uses these life expectancy tables, along with the previous year-end account balance, to come up with the amount. So, for example, if your year-end account
value never changed, your RMD amount would still go up each year, because the tables assume your life expectancy goes down as each year passes.

While I would advise keeping expectations low for any kind of meaningful change in the RMD rules, stay tuned for any further developments in the coming months.

David Novak, CFP® is a Certified Financial Planner™ at Novak & Powell Financial Services in Pinellas County. Please note: he is not an attorney and this article should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.

 

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