Ask Matt: RMD Legislation Update
Retirement and wealth strategies expert Matt Sommer answers questions from advisors on market events, legislation and trends that may impact their clients’ investments.
I’ve received several questions from clients about the RMD proposals floating around Congress. How can I make sense of all the proposed changes and help educate my clients on possible outcomes?
With all of the proposed changes to required minimum distributions (RMDs), clients are sure to have questions about the effects on their retirement planning. President Trump signed an executive order asking regulators to figure out ways for people to keep money in their retirement accounts for a longer period of time. During the fall of 2018, there was a flurry of retirement legislation floating around Congress, with many of the bills addressing RMDs.
There are several factors to consider when discussing these RMD legislative proposals with clients. As a financial advisor, you want to keep your clients well-informed and guide them through any changes that could alter their retirement strategy. Here’s what you need to know to break down these potential legislative changes.
Key Initiatives for RMD Reform
1. Exempt small IRAs from RMDs
One initiative included in RMD legislation proposes exempting small IRAs from required minimum distributions. For example, a retiree with an IRA of $50,000 or less could become exempt from standard RMD rules.
2. Push back the RMD age
Currently, retirement plan account owners must withdraw annually starting the year in which they reach 70.5 years of age. Many of the RMD reform proposals in Congress are seeking to push this age back several years, allowing retirees to keep money in their accounts for a longer time.
3. Update life expectancy tables
Proponents of RMD reform assert that the current life expectancy tables are dated and need to be updated to reflect that people are generally living longer. In 1960, the average American life expectancy was approximately 69 years. By 2016, life expectancy had increased to 78 years1. The good news for retirees? A longer life expectancy could mean a smaller required minimum distribution.
RMD Reform May Have its Downsides
Although the proposals could be beneficial for retirees, it’s essential to understand the ramifications of passing RMD legislation on a larger scale. The benefits and costs of RMD reform may be different for every individual, but there are some general drawbacks to take into consideration.
- Fewer, or smaller, RMDs means less money going into the Department of Treasury. Reducing RMDs or delaying them for several years means that the government will likely lose out on tax revenue, which will have to be made up some other way.
- RMD reform proposals could remove stretch IRAs, causing beneficiaries to lose out on some tax advantages.
For Now, Stay the Course with Retirement Planning
While there are many proposals to change RMDs, it continues to be difficult for the bipartisan Congress to pass legislation. Right now, RMD legislation is in the early stages and the outcome remains uncertain. If new RMD legislation does pass, changes will be phased in gradually, leaving plenty of time for you to inform your clients and plan for any adjustments to retirement strategies.
1 Source: The World Bank Group, as of 2017.
The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional advisor. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.