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.
Multiple Employer Plans
The executive order to expand access to multiple employer plans, or MEPs, is essentially designed to provide access to retirement savings options for small-business owners. Many small-business owners decide that the administrative costs of maintaining a traditional retirement savings plan, such as a 401(k), are prohibitively high, and thus are unable to offer retirement savings options to employees.
The order also directs the DOL to clarify when multiple employer plans can be used, a move that many expect will eventually result in expanded access to MEPs. It is also possible that new rules could emerge to expand access to retirement savings plans for part-time workers, sole proprietors and other nontraditional workers.
MEPs allow unrelated small-business owners to band together, much in the same manner as with association health plans, in order to offer retirement savings plans that are more similar to those provided by large employers. Currently, business owners can only take advantage of MEPs if they satisfy certain tests that require a shared economic nexus and common interests apart from the retirement plan itself. Eliminating the commonality of interest requirement could permit more small-business owners to take advantage of the MEP retirement savings option.
Expanding access to MEPs can provide small-business clients with a new path toward offering retirement savings options to employees, potentially allowing these clients to more effectively attract and retain employees.
Despite the fact that the executive order directs the DOL and IRS to release rules on both the RMD and the MEP issues within 180 days, many still expect that congressional action in the form of legislation will be required in order to create any real changes.
- See previous coverage of RMD planning in Advisor’s Journal.
- For in-depth analysis of the IRA distribution rules generally, see Advisor’s Main Library.
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