The Trump administration recently issued an executive order that could have far-ranging implications both for individual retirement savers, and for small-business owners exploring retirement savings alternatives for their employees.
If the administration's changes are eventually adopted, a potentially valuable retirement savings strategy could emerge for small-business owners, while planning for required minimum distributions (RMDs) would be dramatically altered. While it remains uncertain how the IRS and Department of Labor (DOL) will respond to the new executive order, the changes could have a broad and dramatic impact on the retirement savings tools currently available to both individual and small-business clients.
Retirement Plan Distribution Rules
The currently existing required minimum distribution (RMD) rules essentially require clients to begin withdrawing funds from IRAs when they reach age 70½. According to IRS rules, the first IRA RMD must be taken by April 1 of the year following the year in which the client turns 70½ (after the first year, the annual deadline is Dec. 31). The RMD rules apply only to traditional retirement accounts, while Roth accounts are not subject to lifetime distribution requirements.
Unfortunately, this rule often requires clients to begin taking distributions from their retirement accounts even if they have no current need for the income. In recognition of this, the Trump administration's executive order directs the IRS and Treasury to reevaluate the RMD rules in order to allow clients to keep funds in their traditional retirement accounts for a longer period of time.
It is widely expected that this order will be accomplished by revising the currently existing life expectancy tables used to determine RMDs, as well as potentially pushing back the starting date to as late as age 75. This also reflects the fact that many clients are pushing back their actual retirement dates, and may continue to work well past the age 70 ½ RMD beginning date. While employer-sponsored 401(k)s allow clients who continue working for the employer to delay RMDs, if the client has invested in an IRA, distributions must begin at age 70 ½ regardless of whether the client continues to work.
