On this week’s episode of the Fiscal Blueprint podcast, we continue our conversation on RMD's (required minimum distributions.) Is it time to finally get rid of them altogether? Well, a recent article in Investment News explored this possibility and there are definitely some compelling arguments for this idea. Who knows if it will it ever happen but, it is absolutely worth discussing!
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s only common sense.
Practical Planning segment: Last week we had a good discussion about avoiding mistakes made when confronting RMD’s.
One mistake we talked about was when folks postponed their first RMD, they have to take two the following year. And next year in 2022 the tables are changing. So, you would have to calculate and use the proper table to determine the RMD from the first year you postponed it, 2021. We talked about completing a Roth conversion after your required beginning date or RMD date and we mention that the IRS is pretty strict about this and that you have to take your RMD first, prior to any conversion. And of course, we talked about the potential of a missed RMD and how to correct that with form 5329. Otherwise, it is a 50% penalty the most egregious penalty in the entire tax code.
And after that show I read an article that I thought was interesting, it was in “investment news” and it was titled “Congress, stop the madness and eliminate RMDS”.
It was written by Mr. Ed Slott which I have mentioned numerous times on the podcast. He is probably my go-to resource for all things regarding IRAs and therefore RMDS.
He really seems to have his finger on the pulse of all things regarding IRA accounts. In fact, he was the first one that I heard speak about the elimination of the stretch IRA. Sure enough, in 2020, Congress eliminated the stretch IRA for most non-spouse beneficiaries of retirement accounts.
This provision was passed through the SECURE ACT and it really flew under the radar all of 2020 because of the pandemic!
So, in Ed's article again dated May 13th, 2021, he starts to talk about what some are calling the secure act 2.0. this is potential future legislation that's titled securing a stronger retirement act.
I have yet to see all the proposed changes in this legislation and of course, nothing has passed at this moment in time, however, there is one proposal that is talking about raising the required minimum distribution age from 72 to 75 over a 10 yr. period.
Sounds great on the surface, right? But Ed had some interesting points that I think are worth discussing.
Let’s first talk about the process of calculating and requesting your RMD: the reason I want to talk about this is because I think it will shed some light on his argument of just waiving RMD's altogether.
We have already mentioned that many mistakes are made by seniors when it's time to collect RMDS. And if the age keeps changing all the time period there is more opportunity for mistakes to be made. Therefore, more chance for penalties to be assessed.
The typical process of collecting your RMD:
First, you have to find your December 31st value of your IRA. Go to the correct table (remember there are 3 tables so you have to make sure you use the correct one) Apply the correct factor listed based on your age. Now for inherited IRA’s the correct factor can get confusing because the starting factor is based on your age when you first inherited the IRA and then you subtract 1 from that. (this is before 2020. If you’re a typical non-spouse beneficiary, the new rule is the 10-year rule we spoke about last week). Withhold the correct amount of taxes from the withdraw or you will deal with paying the taxes at a later date when you file the return DON’T FORGET; if you have more than one IRA you have to add up all the IRA’s and other retirement accounts like 401k’s, 403b’s, etc.
It's quite easy to make a mistake especially if you have multiple IRA accounts!
So, in the article, Ed begins talking about statistics the Treasury Department said only about 20% of those who are subject to RMDS take the minimum amount, which means that the remaining 80% take more than the minimum amount simply because they need the funds. Delaying the RMD's to age 75 would only help the 20% that do not need the money.
Now last year because of the pandemic RMD's were waived. But again, this only helped the 20% who did not need the money. Most people still took money out of their IRA because they need it to live on.
So, he goes on to say that the new secure act 2.0 proposal would delay the start of RMD's to 75, leaving fewer years for the 20% to use those funds in retirement. But remember the 80% are unaffected by this because they withdraw the funds anyway. This goes against the secure act rationale that these funds should be used in retirement, since raising the RMD age means more of the funds will pass to beneficiaries.
And this is where I think they're going with this. Again, when your IRA passes to non-spouse beneficiaries they now must withdraw that money within 10 years unless there is some exemption applied. So that would cause a bunch of income into those years which translates to higher revenue for the government.
Also, there's an argument to be made that delaying RMD's would mean people would take larger RMD's when they do begin, also resulting in potential higher tax bills. Putting off RMD's to later years may result in higher overall taxes than if RMD's were spread over more years.
We already talked about all the potential mistakes that could be made and also the fact that all the table numbers are changing next year. This area is ripe for mistakes and therefore the assessment of missed RMDS and missed RMD penalties.
So, the article goes on to say, “stop the madness”, get rid of lifetime RMD's altogether!
So, looking at the statistics it really does beg the question of why bother with lifetime RMD's at all anymore?
They are completely unnecessary especially since the secure act set an end date for when retirement funds will have to be withdrawn after death, this is called the 10-year rule! Why not just eliminate lifetime RMD's and all the problems and worries that come with them? The government is still going to get their tax money and now there is an end date, so they know that once a person passes an IRA to their non-spouse beneficiaries, they're going to get all their tax money within 10 years.
That would also harmonize the RMD rules with Roth IRA’s raise, which have no RMD's.
Eliminating lifetime RMD's will have close to a zero-revenue effect and more likely result in increased tax revenue since 80% of the people will be taking what would have been the minimum or more anyway because they need the funds to live on. Why make them worry about what amount to withdraw, going through their IRA statements, and making all the calculations we discussed earlier?
Let them take what they need when they need it. It might just be that they end up withdrawing more than the minimum, therefore, increasing revenue for the government.
Another interesting idea he brings up in the article is that if there are no required distributions, that may mean more Roth conversions. And when a Roth conversion is done the taxes are paid in that year! So again, the government loves Roth conversions because they're getting tax money now.
Eliminating RMD's may increase Roth conversions!
Yes, the government loves Roth’s. As a matter of fact, in the proposal, they talk about encouraging more Roth contributions and creating Roth options for Sep erase and simple IRA's, which are not available currently with a Roth option.
Ed says it’s clear that Congress loves Roth IRA's they really want full “Rothification” because of the revenue it brings in when tax deductions are not claimed for contributions to retirement accounts.
Yes, he goes on to say that if Congress likes Roth IRA so much, eliminate ING the lifetime RMD's would open the door to more Roth conversions currently required minimum distributions cannot be converted to Roth IR A's, we talked about that earlier period but if there were no RMDS, all IRA funds could be converted. By the way that's what happened last year when the RMD's were waived. Many people did Roth conversions in lieu of taking their RMD. So, 2020 was a test case for this idea.
So just to wrap up this podcast I agree with Ed! There is no longer any need for lifetime RMD's. It causes confusion, headache, and potentially a 50% penalty for seniors who make a mistake. So, this really is a win-win.
Will Congress listen to this logic? I'm not so sure.
Final Disclaimer:
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