RMD Rules Set to Change for Individuals with Lower Account Balances

New RMD Rule Changes: Impact on Retirement Plans

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The Obama Administration quietly inserted a change in the rules for minimum required distributions (RMD) earlier this year that could have major implications for portfolio longevity.

The proposal would exempt those who have $100,000 or less in retirement savings from having to take required minimum distributions from 401(k)s, IRAs, and the like starting at age 70 ½.

The change, tucked away in a Treasury Department document, would significantly alter current requirements that force plan participants in 401(k) and IRAs to begin receiving distributions shortly after reaching age 70½.

Presently, if a participant or account owner fails to take the minimum required distribution for a designated year, the amount not withdrawn is subject to a 50 percent tax.

In addition, taxpayers age 70½ and older are prohibited from contributing to traditional IRAs (beginning with the year they turn 70½).

The rules were designed to prevent taxpayers from abusing the tax-favored treatment of certain retirement assets, and to ensure the government gets their share. In particular, they were designed to prevent taxpayers from leaving these amounts to accumulate in tax-exempt vehicles for the benefit of their heirs.

However, the Obama Administration reasons that exempting those with modest balances from the rules would simplify tax compliance for millions of senior citizens without compromising needed income. In addition, the proposal permits these individuals greater flexibility in determining when and how rapidly to draw down their limited retirement savings.

The administration’s proposal would exempt an individual from the RMD requirements (which for some reason they refer to as MRD requirements) if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations does not exceed $100,000 (indexed for inflation after 2016).

“However, benefits under qualified defined benefit pension plans that have already begun to be paid in life annuity form (including any form of life annuity, such as a joint and survivor annuity, a single life annuity, or a life annuity with a term certain) would be excluded in determining the dollar amount of the accumulations,” the proposal clarifies.

The proposal would also harmonize the application of the RMD requirements for holders of designated Roth accounts and of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored retirement accounts, i.e., requiring distributions to begin shortly after age 70½, without regard to whether amounts are held in designated Roth accounts or in Roth IRAs.

In addition, individuals would not be permitted to make additional contributions to Roth IRAs after they reach age 70½.

The proposal would be effective for taxpayers reaching age 70½ on or after December 31, 2015 and for taxpayers who die on or after December 31, 2015 before reaching age 70½.

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