Changes to RMDs may be delayed, but more potentially impactful ones could be coming your way

November 15, 2019 10:11 am

Derek M. Amey

Partner & Portfolio Manager

Over the summer I wrote a blog about how the Senate and the House were independently working to change the timing of when retirees would need to start taking their Required Minimum Distributions (RMD). Over the last few weeks there’s been some news, so I thought an update was due.

Secure Act Update
As a reminder, the House passed the SECURE act back in May. The bill would have pushed out the first year that a retiree must take their RMD from the current age of 70 ½ to age 72. The Senate had yet to address the bill until last week. Unfortunately, the bill did not pass on November 7th and now some folks feel that with the Congressional Holiday recess looming and with Congress’ usual reluctancy to pass major legislations in an election year, the bill may be dead. There is some hope that the bill could be attached to the next spending bill (currently set to expire on November 21st) but only time will tell. I’d be remiss if I didn’t mention that the current impeachment hearings are not helping increase the probabilities of ANY bill passing, let alone the SECURE Act. So as for now, we must face the reality that this bill may not get passed.

New Potential Change To RMD Process
Congress isn’t the only government agency that can impact changes to the MRD rules. The IRS controls the Life Expectancy Tables which are used to compute the percentage of a retiree’s savings that must be withdrawn every year. The last time these tables were changed was back in 2002, so they are probably overdue for an update to reflect the fact that many Americans are living longer.

The IRS submitted a proposal on November 8th (ironically the day after the SECURE ACT failed in the Senate) to change the life expectancy tables. The proposal is now open for comments from the industry and the public, and a hearing will be held in January before a decision is made to make the change.

IF approved, retirees would see a drop over their lifetime in the amount they were legally required to withdraw from their retirement accounts. From one year to the next, the differences do not appear to be life changing. However, over a long retirement period, if a retiree can support themselves without needing more than their RMD, the net affect would be that their heirs would inherit more.

Example
Assume a single retiree will turn 75 in 2020, and that they have $500,000 in their retirement accounts at year end.

RMD under current rules: $21,834.06

RMD under NEW rules: $20,325.20

Net Difference: $1,508.86

As you can see, the reduction in the RMD in any given year is not tremendously significant. However, over a 20-year retirement period, with the ability for the “savings” to continue to grow tax-deferred within the IRA, it could be significant to whomever inherits the IRA.

We’d like to see both the SECURE Act and the IRS proposals pass. Retirees need help preserving their retirement savings and reducing how much they are required to take out every year would help. The IRS changes would probably have a larger impact then the SECURE Act, since they are proposing reducing the amount every year in retirement as opposed to just delaying the start. If/when they pass both could have a potential impact on one’s estate plan, so expect to hear from your financial advisor should they become law!

 

Derek Amey serves as Partner and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.