Changes in RMDs May Be Coming Soon

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Almost a year ago in this column we mentioned the potential for changes in retirement distribution rules that would affect most seniors. While not fully implemented, these changes are now one large step closer to fruition.

Last month the House of Representatives passed sweeping new legislation that addressed several different topics affecting retirement investment accounts.

I’m not sure what was more surprising between these changes actually being to the benefit of individuals, or that the vote in favor of passage was 417-3.

Probably most notable for most seniors is the potential change in rules regarding Required Minimum Distributions (RMDs).

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 SEP IRAs, Simple IRAs, 403(b)s, and other similar accounts—is required to take a minimum amount of the account starting at age 70 ½.

Technically, one can delay the initial RMD until the year following 70 ½, but then would be required to take two RMDs in that year.

The total gross amount of the distribution, which can be taken in the form of cash and/or securities, is taxable income in the year in which it is taken out, and you can withhold some of this amount for taxes.

Basically, the government doesn’t care how you take the distribution, just that you do and it can therefore be taxed.

One of the provisions in the legislation is to increase the age when RMDs must begin from age 70½ to age 72. The change is meant to recognize increases in life expectancy since 1986, when RMDs were first enacted.

Obviously, the longer distributions are delayed, the more time for compounding to do its work.
There is also another potential change in the RMD rules, which will have less effect on retirees but would impact their heirs who stand to inherit the assets.

Another part of the proposed legislation is a “10-year rule,” which will require virtually all non-spouse beneficiaries to fully distribute any IRA account they inherit within 10 years of the owner’s date of death, rather than the current rules of being able to take a minimum amount based on their own life expectancy.

While the Senate still needs to produce its version of the legislation, it appears that the first meaningful changes for RMDs in decades are on the horizon.

David Novak picture

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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