Trump called on the Treasury to look into making the tweak Aug. 31 in an executive order on retirement security. The primary focus of the order was asking the Labor Department to look into opening multiple employer retirement savings plans—referred to in the order as “association retirement plans"—to more small businesses.
Increasing the life expectancy rates or “mortality tables” associated with the minimum distribution rules would lower the amount of money a retiree is required by law to take out of 401(k)s or individual retirement accounts after the person reaches age 70 1/2.
Treasury may choose to update the mortality tables if it determines the tables currently being used don’t reflect the correct life expectancy.
“Right now, retirees are being forced to make minimum withdrawals” of money they don’t need, Paul Richmond, vice president of governmental affairs for the Insured Retirement Institute, told Bloomberg Law.
Once that money is taken out of a 401(k) or an IRA, it’s taxable and can’t accumulate as it could have if left in the account, Richmond said. Updating the tables would reflect increased longevity and prevent retirees from being required to take too much, too early.
About 22.7 percent of retirees over the age of 71 take more than the required distribution amount out of their savings account each year, according to a recent report from the Employee Benefit Research Institute.
The portion of retirees taking more than the required minimum distribution is consistently higher among those with less in their savings, EBRI found.
Updating the mortality tables alone “won’t be a massive change,” Alan Tawshunsky, an employee benefits attorney at Tawshunsky Law Firm PLLC, told Bloomberg Law. “It’s enough to matter, but people shouldn’t be thinking of it as some enormous new benefit.” Tawshunsky said. Tawshunsky is a former Treasury Department and Internal Revenue Service official.
Although mortality tables for traditional pension plans have been modernized recently, the updating of rules for 401(k)s and IRAs has likely been avoided because they’re more complex, Tawshunsky said. Those complexities include things such as joint life expectancy and special relief that a beneficiary’s actual age doesn’t have to to be used in the minimum distribution calculation, he said.
Bigger Fix in Congress
Proposed legislation by Rep. Richard Neal (D-Mass.) could potentially be a bigger fix.
The Retirement Simplification and Enhancement Act (H.R. 4524) would exempt retirees with less than $250,000 in saving from minimum distributions entirely. The bill targets those with lower savings, partially so they can avoid the 50 percent excise tax that comes when a retiree fails to take a minimum distribution.
“Let most ordinary seniors live in peace and not have this 50 percent excise tax hanging over their heads,” Mark Iwry, who oversaw retirement policy at the Treasury during President Barack Obama’s administration, told Bloomberg law.
Neal’s bill would put into effect a plan similar to one put forward while Iwry was with the Treasury.
Wealthier individuals, who often have savings outside their 401(k) or IRA to get them through retirement, may use their tax favored savings to pass on to a beneficiary. A lower minimum distribution rate would favor individuals who have the ability to do that, Iwry said. It’s also not as much of a “heavy lift” for them to monitor their savings to comply with minimum distribution rules.
“Congress intended the RMD (required minimum distribution) rule to prevent tax favored retirement plans from being used for estate planning instead of retirement security,” Iwry said.
Neal introduced his bill in December 2017 and it’s currently in the Committee on Ways and Means and the Committee on Education and the Workforce.