Rich people win (again) if the new RMD proposals become a reality

Required minimum distributions, or RMDs, the mandatory amounts people must withdraw from certain retirement accounts or face a harsh penalty from the IRS, may be about to change.

President Trump recently directed the Treasury and Labor departments to consider the implications of delaying the age of required minimum distributions for retirement plan withdrawals.

Financial advisers say they already know the impact, and it’s great — for high net worth clients, at least. As for low- and middle-income retirees, it makes no difference. And for the government, it might even be a bad thing. “It is an unnecessary act for the majority of the population who are drawing down their retirement assets,” Erika Safran, a financial adviser at Safran Wealth Advisors in New York, said about the executive order. “It’s a nice bonus for the small percentage of the population who does not rely on retirement savings.”

Required minimum distributions most negatively affect retirees with large retirement account balances, because these withdrawals are taxed as ordinary income and push account holders into higher tax brackets upon distribution. The current law requires Americans, after turning 70 ½, to take a minimum distribution from retirement accounts (except for the one they may have at a current employer if they’re still working). The actual amount distributed depends on their age, the year they’re taking the distribution and a rate determined by the Internal Revenue Service. If they don’t take the withdrawal, the penalty fee is 50% of what the distribution should have been.

When retirees are pushed into higher tax brackets, they’re also at risk of facing higher taxes on Social Security benefits and incurring a surtax on these taxable investments and Medicare, said Ashley Folkes, divisional vice president of AXA Advisors in Phoenix This group of investors often want to keep their assets in these accounts because of the tax benefits too, especially if they intend to leave it to beneficiaries after they die. The executive order is based on the assumption that nobody needs the money in their retirement plans, said Alicia Munnell, director of Boston College’s Center for Retirement Research.

But the key to who benefits from this executive order will depend substantially on how much they need this money. For those who do have retirement accounts, and could use the money to fund their lifestyles and health bills, delaying the age for RMDs doesn’t amount to much. You can start taking withdrawals from 401(k) plans at 59 1/2 years old, and even a few years earlier in certain circumstances. “The taxpayer who actually needs the RMD to cover living expenses is the one that doesn’t get much or any benefit from this kind of change,” said Jason Lina, a financial adviser at Resource Planning Group in Alpharetta, Ga. “More often, this is the lower net worth taxpayer who is living off Social Security and his or her RMD.” Most people aren’t working until 70 ½ years old, Munnell added.

The plan would likely hurt the federal government, which benefits from the tax incurred on these withdrawals. “Since the point of RMDs are to generate taxable income from these distributions, it probably won’t help the federal deficit if they push the age back,” said Mark Beaver, a financial adviser at Keeler and Nadler in Dublin, Ohio. Beneficiaries might also benefit from seeing these assets as inheritances, but not necessarily from a tax perspective. “It’s not like the income tax is going away by deferring the RMDs,” said Scott Bishop, a financial adviser at STA Wealth Management in Houston. “It just allows the tax bill to grow even bigger.”