Washington is eyeing an update to rules around required minimum distributions, which could result in big changes for financial advisers' retiree clients in the near future.
Two retirement bills winding their way through Congress' legislative gears — the Family Savings Act and the Retirement Enhancement and Savings Act — include provisions related to RMDs, as does a recent executive order on retirement security from President Donald J. Trump.
To some experts, these developments signal that reform around required minimum distribution rules, which govern how taxpayers draw down their tax-deferred retirement accounts and haven't been updated in several years, is an important initiative for policymakers.
"I would predict that RMD reform will be part of the retirement legislation likely to be passed within the next year or so," said J. Mark Iwry, former deputy assistant secretary for retirement and health policy at the Treasury Department during the Obama administration.
The Family Savings Act, which the House Ways and Means Committee
passed Sept. 13, would
exempt retirees from taking RMDs if they have less than $50,000 in total assets held in retirement accounts. Current rules mandate that taxpayers begin drawing down their accounts when they turn 70½, regardless of the account value.
The bill, part of the
Tax Reform 2.0 package, is expected to come up for a full vote in the House by the end of the month or in early October.
Perhaps most important for financial advisers, the Retirement Enhancement and Savings Act, which has been introduced in both the House and Senate, would effectively scrap the "stretch IRA."
The bill would
amend RMD rules related to inherited IRAs. Non-spouse beneficiaries who inherit retirement accounts with an aggregate balance of more than $450,000 would need to draw down the assets within five years after the original owner's death.
Current rules allow those who inherit IRAs and defined-contribution accounts to "stretch" distributions over their life expectancy. The bill would compress distributions into a much narrower window and could, for example, nudge clients into higher income tax brackets. (There are a few exceptions in RESA for the disabled and chronically ill, minors and people who aren't more than 10 years younger than the deceased.)
Interestingly, both the stretch IRA and RMD exemption provisions were found in President Barack Obama's budget proposals. (The RMD exemption ceiling was $100,000 rather than $50,000. The Obama budget also proposed requiring RMDs from Roth IRAs, which are currently excluded from RMD calculations.)
While RESA
unanimously passed the Senate Finance Committee in the previous congressional session, the stretch IRA provision is controversial in some retirement circles, which may reduce the chances of its eventual passage in legislation.
"The proposal to exempt smaller balances from RMDs is likely to be retained. Reform of the stretch IRA, which raises revenue, is more uncertain due to vigorous lobbying against it," Mr. Iwry said.
The Joint Committee on Taxation, in its review of Mr. Obama's last budget proposal, said reforming stretch IRAs would save the government $6.2 billion over the 10 years through 2026.
In addition to the recent legislative developments, Mr. Trump
issued an executive order in August that was partly devoted to RMDs and called for Treasury to review current rules to see if retirees can keep more money in retirement accounts for a longer period of time.
Experts say this is effectively a call for the agency to update longevity tables underpinning RMD calculations. An update to the tables would take into account increased life expectancy. The result: Retirees would be able to take smaller annual distributions since they would be spread over a longer period.
"I think there's going to be something on RMDs," Doug Fisher, director of retirement policy at the American Retirement Association, said of his expectation for legislative or regulatory action. "RMDs are top of mind, and they have been for a long time."
