President Donald Trump signed an executive order Friday, August 31, that proposes asking for reviews on changing certain rules for tax-deferred retirement savings such as 401(k)s and individual retirement accounts, or IRAs. Trump signed the order during a scheduled visit to Charlotte, N.C., and asked the Treasury Department to push forward several bipartisan changes to how retirement plans operate.
Here are the big initiatives:
- Review Required Minimum Distribution (RMD) rules with an eyes towards starting them later than age 70 ½ and/or reducing them once they start;
- Consider the creation of pooled Multiple Employer Plans, which would allow companies to offer financial institutions’ 401(k) plans with participants pooled from multiple unaffiliated employers, rather than asking employers to create their own independent 401(k) plan from scratch; and
- Review paperwork and administrative requirements for employers’ workplace retirement plans with the intent of lowering costs and spurring retirement plan adoption among small and medium businesses.
No changes are certain, and the changes if enacted would likely take months or years to go into effect. And it’s also unclear what impact (if any) the executive order will have on pending bipartisan retirement legislation in Congress.
Currently, holders of tax-deferred retirement accounts are required to begin minimum withdrawals from the accounts beginning the year following age 70 1/2. These RMDs are predetermined amounts in a table set by the IRS according to age and must be taken on an annual basis. The purpose of the withdrawals is for the government to start collecting the taxes owed on these accounts, which have enjoyed tax-free status until then.
According to CNBC, the reviews would be of the life expectancy tables from the IRS for the purpose of updating the tables, which may allow retirees to withdraw lower RMDs from their tax-deferred retirement accounts. These tables were last updated in 2002, and the average life expectancy has risen since then from under 77 to 78 1/2, as derived from data compiled from the Federal Reserve Bank of St. Louis.
This could be helpful to retirees because the tax hit of these withdrawals can be spread out more over a longer period of time. Taking large withdrawals can significantly increase income levels, which translates to a higher tax bracket for many. These smaller distributions can also help those who have inherited tax-deferred accounts and are taking distributions.
If the rules for open multiple employer plans are relaxed, small business owners could join with other, dissimilar small business and implement savings plans for their employees. That could help these business owners attract more skilled employees because of the retirement savings plans added to their employee benefit packages.