The IRS has proposed trimming required minimum distributions (RMD) — the amounts of money retirees must withdraw from their IRAs and 401(k)s and other retirement accounts, generally after they reach age 70-1/2.
XBy proposing that required minimum distributions — which are mandatory withdrawals — be smaller, the IRS would let savers keep their money tax-sheltered for longer. That would enable the retirement accounts to last longer.
Withdrawals typically are taxable income. Withdrawals from Roth IRAs are tax-free. A Roth IRA is also exempt from RMDs in any case. A Roth 401(k) account is not exempt from RMDs, but the withdrawals are tax-free.
With an account that RMDs apply to, unless you qualify for an exception, you must start taking RMDs April 1 of the year after you turn age 70-1/2.
The proposed regulations would apply to account owners and beneficiaries.
Required Minimum Distributions Proposal Would Take Effect In 2021
The proposal — whose enactment is not guaranteed — would not take effect until 2021.
Other, separate proposals could also impact required minimum distributions. Congress is considering increasing the age at which RMDs generally must start to age 72 from the current 70-1/2.
That same congressional proposal would require heirs to take taxable withdrawals over fewer years than current law. That would make each taxable payout larger, generally resulting in larger taxes owed on that money. That would also deplete the retirements accounts that the money comes from sooner.
RMD Rule Would Update Life Expectancy Tables
Technically, the proposed changes take the form of longer life expectancy for account owners. The dollar size of RMDs are determined by dividing account balances by numbers that approximate a person's life expectancy at various ages.
Overall, IRA experts see the proposal as having only moderate impact. "The changes are relatively minor, adding maybe a year or two to life expectancy, leaving slightly more in the IRA so it will last longer," said Ed Slott, founder of IRAHelp.com. "But this will still lower RMDs, and in turn lower the tax bill each year — but the savings will be minor."
Examples Of Proposal's Impact
If you are 70 years old and have an IRA balance of $500,000, your RMD under the proposed rules would be $17,182 or about $1,066 lower than under the current rules, Slott says. That lets you keep about 6% more tax sheltered inside your retirement account.
A 75-year-old with an IRA balance of $750,000 would have to withdraw $30,488 under current rules. That would be about $2,263 lower than his or her RMD now, Slott says. That 75-year-old could keep about 7% more of his or her own money.
The current rules and tables have been in effect since 2002.
The proposal to shrink required minimum distributions comes amid a blizzard of annual notices about changes to various key IRS rules — such as the new contributions limits to IRAs and 401(k) accounts for 2020.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and active mutual fund managers who outperform the market by picking top-performing growth stocks.
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