The Trump administration’s executive order directing the IRS, Treasury and Congress to examine the currently existing required minimum distribution (RMD) rules have spurred a legislative proposal that would allow certain retirement account owners to escape the requirement that owners of traditional retirement accounts begin taking taxable distributions from those accounts once the individual reaches age 70 ½.
We asked Professors Robert Bloink and William Byrnes, who are affiliated with ALM’s Tax Facts, and hold opposing political viewpoints, to share their opinions on the new legislative proposal and its potential impact if passed in its current form. Below is a summary of the debate that ensued between the two professors.
Byrnes: Eliminating the RMD rules is a great idea, and one that would be welcomed by most retirement savers. Eliminating RMDs would allow account owners who don’t need the funds to cover living expenses keep their money in their retirement accounts longer, to grow on a tax-preferred basis, until the funds are actually needed to cover living expenses during retirement. It lets the client decide when he or she needs the money.
Bloink: But if you look at the actual legislative proposal, only clients with retirement accounts valued at $50,000 or less would be able to escape the RMD rules. If the client’s retirement account value is $50,000 or less, it’s actually likely that that client is a lower-income client who will need those funds to pay for living expenses. In fact, they may need the funds to supplement income even before the RMD rules kick in at age 70 ½.
Byrnes: But why require them to begin withdrawing funds at age 70 ½? The rule is antiquated. Establishing age 70 ½ as a presumed retirement age does not reflect the current realities of retirement. Individuals are working well past age 70 ½, so the RMD rules are not effectively serving the purpose that they were originally designed to serve.
Bloink: Sure, clients are working longer, past age 70 ½ in many cases. However, many of these clients are not working in the positions that they originally held, or are working on a very part-time basis for a variety of reasons, including to stay active and involved in the community. The rules are designed to make sure tax-preferred retirement savings vehicles are actually being used for retirement savings.
Byrnes: Regardless of the field in which the account owner works, the bottom line is that if he or she doesn’t need the money, the government should not be allowed to tell them that they have to take it anyway. Many of these clients would prefer to keep the funds invested and avoid the income tax liability that a withdrawal generates.
Bloink: The RMD rules are in place for a very specific reason—to require that this tax-preferred savings strategy is used for retirement purposes, to encourage retirement savings while the client is still working. Clients who don’t need the retirement funds by age 70 ½ likely have sufficient assets and income apart from the $50,000 retirement account, so that the change essentially allows these clients to transform the retirement savings plan into a tax-preferred estate planning tool.
Byrnes: Retirement accounts are inherited by surviving spouses and other heirs every day. A specific set of requirements applies to inherited IRAs, so that these accounts cannot simply be passed from generation to generation without any intervening tax liability. If you inherit an IRA, you are required to begin taking distributions, and this rule is separate and apart from the rules that govern distributions for the original account owner.
Bloink: But the fact is, if this proposal is passed in its current form, higher income clients have an incentive to maintain lower-value retirement accounts in order to pass those funds onto their heirs without paying any taxes on the funds during life. Without sufficient safeguards, eliminating the RMD rules could create a huge tax loophole for wealthy clients to reduce taxable income during life via contributions to what essentially amounts to an estate planning account.
— Check out more content by Bloink and Brynes at Tax Facts
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