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Trump Calls For Review Of Rule Requiring RMDs At 70 1/2
FYI: A presidential executive order that could lead to investors keeping their money longer in tax-deferred retirement accounts? What’s not for investment advisors to like?
In 2011 the English government (using data from England and Wales) conducted a study to estimate the probability of an individual 50 years old in 2011 to reach 100 years of age. The results were 11.4% for males and 17.0% for females. These numbers if applied to the US, would imply that we might be significantly underestimating the income requirements during retirement.
To me that proposed order is just another way for those who already have way more than they need to shelter even more of their gains from the undeserving masses. As if offshore accounts and slimy accounting weren't enough.
The IRA/401k system of retirement savings is really a regressive form of taxation that benefits the wealthy with the most to contribute to their plans the most and the poor with nothing to contribute the least or in reality not at all. The longer you extend that tax deferral of such retirement plans, the more regressive the tax system becomes. So if the RMD of 70 1/2 is eliminated the wealthiest investors get to defer their taxes indefinitely, creating a permanent tax shelter for them. The purpose of the original legislation was to encourage people to save for their own retirement and then USE the money they withdraw in retirement in lieu of having a tradional centrally managed pension plan. Eliminating RMDs would shift the whole intent and purpose of such plans to make them permanent tax shelters for the rich.
Last week the dickhead wanted to take raises away from civilian federal employees. The deficit,,,, he said was the reason. Now he wants to delay revenue for the federal government,,,,, increasing the same deficit he was so concerned about last week. NEVER FORGET,,,,the ultimate purpose of the REPUGLICAN party is to put more money in their own pockets. All the other stuff is just noise and distraction so that folks vote against their own economic interests.
@LewisBraham and @larryB, totally agree. The deficit is projected to worsen just from the 2017 tax cut while enriched those in the upper tax brackets. Disgusting!
What say you, repuglicans board members? I am old enough to remember when fiscal responsibility mattered to you people. Or so you said. Now,,,, in your unrelenting greed you don't even pretend to stand for anything except I WANT MORE FOR ME.
The benefits for high-net worth investors if required minimum distributions (RMDs) are eliminated are hard to miss.... “Often times, these clients would prefer not to get taxed either because their income is very high or they would prefer to keep this money tax deferred for the next generation.
Agreed that the rest of the stuff is just noise. But some of the noise is worth listening to, such as the thought that sometimes simplifying things is a good idea.
So let's simplify the rules for inherited IRAs by eliminating stretch IRAs altogether. Five years and out (take the money from inherited IRAs over five years or less). The point of an individual retirement account tax shelter is to shelter your retirement assets, not your legacy. The opposite, getting rid of RMDs altogether, would just distort the retirement purpose even further.
Kitces:
From a tax policy perspective, the tax code provisions allowing tax-deferred growth for traditional retirement accounts (and tax-free growth for Roths) were created to help individuals and couples save for retirement, not their heirs. While this challenge is at least partially ameliorated by the fact that beneficiaries themselves are subject to Required Minimum Distributions after the death of the original retirement account owner, the fact that many/most retirement accounts are left to younger individuals of the next generation means that often the tax preferences for retirement accounts apply even longer for beneficiaries than for the original contributor!
Many Americans have found themselves working well beyond the typical retirement age. Many of these people are over the age of 70. The reasons for this situation matter, but for the sake of this discussion, I'll restrict my comments to the question of whether or not changing mandatory withdrawals is a good thing. I imagine there are some who would take advantage of the ability to avoid mandatory withdrawals but there are others who would benefit from additional time for their investments to compound. The vast majority would still need to withdraw money on a regular cadence but allowing the untapped portion to further compound, tax deferred, in my view is good policy. Any abuses of the policy can and should be addressed. Furthermore, even if the IRA was to somehow morph into a Legacy Trust, eventually the money has to come out. Tax a little now, or tax more later?
@davidmoran: What if the retired person is still not ready after that five year window? And, should ROTH treatment (as promised) ever be touched? ROTH's by their very nature have already been taxed, no?
@DavidrMoran. Hey,,,,, it's a subject that is on my mind right now. I will be turning 70.5 next year,,,, I was pointing up his hypocrisy... I also understand that the elite don't need the money and would be happy to let it grow tax deferred. Regular folks will need the money and it might be taxable,,, particularly if husband and wife are of a certain age.
What if there were mandatory withdrawals after an account reaches a certain balance? This would provide relief to those needing to catch-up, but address perceived abuses on the other side. Thoughts?
@larryB: I understand the question of fairness in regards to the rich using a retirement account in a manner not as beneficial to those with less. To some this may be viewed as an abuse. My first thought is allowing savings to grow, tax differed, will only create a bigger source of tax revenue at some point in the future (point of sale). However, I believe a practical compromise may be capping the allowance for tax differed treatment (overall account balance) a more practical approach.
>> What if the retired person is still not ready after that five year window?
The usual response is Well, tough.
As for 401k / trad ira caps, they already are hard, and too low, though not quite as you propose. Capping balances would punish market success, though, no?
>> What if the retired person is still not ready after that five year window?
The usual response is Well, tough.
As for 401k / trad ira caps, they already are hard, and too low, though not quite as you propose. Capping balances would punish market success, though, no?
I suppose it depends on where you set the cap. This sort of treatment could create a vehicle to allow any family, with time, to address poverty.
IMHO, the suggested rationale that RMDs be eliminated (or at least pushed back a few years, say, to age 75) because some people (a) are working now so don't need the money (b) will need the benefit of longer tax deferrals on those few years of RMDs they take before they retire, is a red herring.
If that really is a problem, it can be easily addressed without making broad changes in RMDs that affect everyone.
To some extent, it is already addressed. If someone over 70 works for an employer that offers a retirement plan accepting rollovers, the worker need just transfer the IRAs into the retirement plan. That gets rid of any RMD so long as the person continues working for the employer.
"The vast majority would still need to withdraw money on a regular cadence but allowing the untapped portion to further compound." Those workers in this "vast majority" withdraw money (RMDs or more) on a regular cadence and leave the rest of the IRA untapped to further compound. Done! That's the way things work now.
For the few (the "unvast minority"?) who don't need any money while working, they pay their taxes on the modest annual RMDs ("tax a little now") for a few years while they continue to work. They're not required to spend those RMDs. So they move their RMDs to taxable accounts, where they "benefit from additional time for their investments to compound"
There's no need to create more opportunities to abuse the system, merely to address what is to a large extent (i.e. for the "vast majority") not a problem. And for the few who are substantially affected, there are more targeted ways of helping them.
The idea of IRAs remains retirement. RMDs are a way of forcing the retiree to draw (most) of the money out of the tax shelter.
Would you use caps the same way, e.g. by lowering the cap each year for a retiree, and require anything above that cap to be withdrawn annually? That would certainly be more progressive. Everyone below the cap would be treated the same, but the more affluent would be deprived of a greater tax shelter (while still being able to keep their money, just post tax).
@msf: The uppermost cap would not change. In my view the intent isn't to exhaust the account. The intent is to allow those who are less fortunate to grow their balances, those at or above the cap, will pay and the government receives a never ending source of growing revenue.
I believe most of us at one point or another found ourselves asking, where did the time go? Regarding investments, time is the most precious component alongside rate of return. There are some who come late to the party and using an uppermost cap would allow those who procrastinated, more time. In my view, the vehicle could also be used by families to create opportunity, if not for them, their love-ones. The public interest is served all around.
Suppose there were a cap, where all amounts greater than the cap had to be withdrawn: Age 71: $1,000,000 Age 72: $ 970,000 Age 73: $ 940,000 ... Age 81: $ 700,000 ... Age 91: $ 400,000 ... Age 101:$ 100,000 Age 102:$ 80,000 Age 103:$ 60,000 Age 104:$ 40,000 Age 105:$ 20,000
How would this gradually reduced cap impede those who started saving late? ISTM that they're the ones who would benefit, since they would have the smaller accounts and thus be allowed to let their IRAs grow.
Perhaps you had something different in mind for how a cap (even a fixed limit cap) would work?
Yes, I did have something else in mind. Using your example, if the upper limit remains static (at a million), the amount of income for the Retiree, and Government can be sustained theoretically forever. Upon death, the balance transfers to the heirs, but the revenue for the Government is maintained. The proper incentives are present to encourage investment, tax revenue is available for the public welfare (Government), and family legacy planning is possible.
I would have to concede, your method helps to address the overall retirement problem as well. I'm just questioning the need to exhaust the account when you could maintain the magic of compounding forever.
@DavidRMoran I'm not sure my answer to your question to me would be welcomed on this board. But let me pose a different question: How successful have such tax deferred plans been at their original intention of providing ordinary Americans with a secure retirement? If the answer is not very successful, perhaps alternative means of providing that security are necessary.
Mandatory withdrawals from an IRA do not mandate spending. The money that is withdrawn, less taxes, can compound in a taxable account forever. It will even get a step up in basis at death, which doesn't happen in an IRA.
I do though have a real concern with "forever". This is how wealth concentrates within families. I see no public interest in that. Nor is there a self-evident right to direct where your money goes after death. As Blackstone wrote:
Naturally speaking, the instant a man ceases to be, he ceases to have any dominion: else if he had a right to dispose of his acquisitions one moment beyond his life he would also have a right to direct their disposal for a million of ages after him . which would be highly absurd and inconvenient. All property must, therefore, cease upon death, considering men as absolute individuals unconnected with civil society. . . . Wills, therefore, and testaments, rights of inheritance and succession, are all of them creatures of the civil or municipal laws
@msf I agree. I believe allowing indviduals to control massive sums of wealth passed down for generations in perpetuity is a fundamentally un-American and anti-democratic concept. We don't need kings, queens, earls and dukes with inherited titles and wealth in this country. We fought a revolution against Britain to not have that here. Earning one's wealth is one thing; being born with limitless wealth is another thing entirely.
Comments
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/223114/diffs_life_expectancy_20_50_80.pdf
So let's simplify the rules for inherited IRAs by eliminating stretch IRAs altogether. Five years and out (take the money from inherited IRAs over five years or less). The point of an individual retirement account tax shelter is to shelter your retirement assets, not your legacy. The opposite, getting rid of RMDs altogether, would just distort the retirement purpose even further.
Kitces:https://www.kitces.com/blog/proposals-for-eliminating-stretch-iras-repealing-nua-and-the-3-4m-retirement-account-cap-in-the-fy2016-treasury-greenbook/
I wonder if there is a progressive case to be made for handling Roths differently, as there is and has been for the new SaLT-deduction caps.
>> What if the retired person is still not ready after that five year window?
The usual response is Well, tough.
As for 401k / trad ira caps, they already are hard, and too low, though not quite as you propose. Capping balances would punish market success, though, no?
If that really is a problem, it can be easily addressed without making broad changes in RMDs that affect everyone.
To some extent, it is already addressed. If someone over 70 works for an employer that offers a retirement plan accepting rollovers, the worker need just transfer the IRAs into the retirement plan. That gets rid of any RMD so long as the person continues working for the employer.
"The vast majority would still need to withdraw money on a regular cadence but allowing the untapped portion to further compound." Those workers in this "vast majority" withdraw money (RMDs or more) on a regular cadence and leave the rest of the IRA untapped to further compound. Done! That's the way things work now.
For the few (the "unvast minority"?) who don't need any money while working, they pay their taxes on the modest annual RMDs ("tax a little now") for a few years while they continue to work. They're not required to spend those RMDs. So they move their RMDs to taxable accounts, where they "benefit from additional time for their investments to compound"
There's no need to create more opportunities to abuse the system, merely to address what is to a large extent (i.e. for the "vast majority") not a problem. And for the few who are substantially affected, there are more targeted ways of helping them.
Would you use caps the same way, e.g. by lowering the cap each year for a retiree, and require anything above that cap to be withdrawn annually? That would certainly be more progressive. Everyone below the cap would be treated the same, but the more affluent would be deprived of a greater tax shelter (while still being able to keep their money, just post tax).
There is a public interest in seeing that people save enough for retirement, so that, in the old British vernacular, they do not go on the dole.
What is the public interest in seeing that wealth is transferred to offspring or other beneficiaries? Especially ones of working age?
Age 71: $1,000,000
Age 72: $ 970,000
Age 73: $ 940,000
...
Age 81: $ 700,000
...
Age 91: $ 400,000
...
Age 101:$ 100,000
Age 102:$ 80,000
Age 103:$ 60,000
Age 104:$ 40,000
Age 105:$ 20,000
How would this gradually reduced cap impede those who started saving late? ISTM that they're the ones who would benefit, since they would have the smaller accounts and thus be allowed to let their IRAs grow.
Perhaps you had something different in mind for how a cap (even a fixed limit cap) would work?
I do though have a real concern with "forever". This is how wealth concentrates within families. I see no public interest in that. Nor is there a self-evident right to direct where your money goes after death. As Blackstone wrote:https://www.jstor.org/stable/25102211