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Retirement: How RMDs May Be Changing

Summary

Required Minimum Distributions, or RMDs, may get their first update in decades.

Allowing small businesses to form MEPs, or Multiple Employer Plans to spread and reduce costs and allow more employees to save for retirement.

A new executive order by President Trump seeks to change the way we take Required Minimum Distributions, or RMDs. He has requested the Department of Labor look at two items over the next six months:

  1. Increasing or removing altogether the age required for RMDs
  2. Allowing smaller businesses to join together to offer retirement plans

Increasing/ Removing the Age Requirement

As it stands, RMDs are required from most retirement accounts at age 70 1/2. The amount they must take out annually is based on life expectancy tables issued by the IRS. The purpose of reviewing the rules would be to update those tables and allow account holders to take RMDs later in their lives. (Remember: Roth IRAs do not come with mandated distributions until after the death of the owner).

As retirees are living longer, they are outliving their nest eggs. The thought is that by extending the age in which RMDs are required, they will delay taking withdrawals thereby extending the duration their funds last as well as avoid a jump in tax liability by continuing to defer.

Lower Costs with Multiple Employer Plans

The goal here is for small businesses to team up, so to speak to achieve economies of scale and share the costs associated with setup and maintenance of these plans. Currently, only companies in related fields can join forces. This would allow Multiple Employer Plans, or MEPs that spread those costs among many smaller firms making a plan more likely to be offered to their employees. This is similar to PEO plans for medical insurance that allow smaller companies to join together and negotiate lower medical insurance premiums.

Currently, it is costly for small businesses to offer retirement plans and according to Pew Research, 37% say its too costly for them to set up retirement plans and another 22% say too costly and burdensome to maintain. Another point is that employers with more than 500 employees are more likely to offer retirement plans than are employers with fewer than 100 employees. This order seeks to level that playing field.

Conclusion

While the order does not immediately affect workplace retirement plans, the order provides valuable insight on the administration’s workplace retirement policy.

However, even if the executive order pans out, it could take years for the rules to change. It also isn’t clear whether a simple rule change can be done without congressional approval. And speaking of congress, they have their own plan for retirement and tax changes- currently developing a broader measure to ease rules on retirement plans among other items.

Either way, if you have an IRA or 401k that you don’t need to tap into right away, these changes could make a huge difference in your financial plan for retirement. For many, it would mean having a lower tax bill as well as more security than ever. Only time will tell if these changes will come to pass and in what capacity the final changes will look like.

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