Financial Sense: The IRS Took 10 Years to Update the Rules
By Jason Glisczynski
The year 2012 was the last time the IRS updated the tables used to calculate the annual RMD (Required Minimum Distribution) amount for retirement account holders.
The annual RMD is an amount the IRS requires you to take out of your retirement accounts when you reach a certain age and the penalty for failing to take the money out is 50% of the amount you were supposed to take. The amount you must take is calculated based on your age. In addition, there are separate RMD rules for beneficiaries inheriting retirement accounts.
Two major changes have recently been made to the RMD rules: The starting age for account owners was moved from age 70 ½ to age 72 with the SECURE Act, and now the IRS has adjusted the life expectancy tables resulting in lower required distributions. In short, retirement account owners are taking less out and starting the process later in life.
At first glance, what most talking heads and financial professionals out there are saying is this is wonderful news! We can delay taking money out for longer and when we do have to take it out we are required to take less, resulting in a larger nest egg!
My, oh my, what a fast one has been pulled on the American saver.
What was cleverly disguised to bolster retirement savings is nothing more than a tax grab for the U.S. Treasury Department. Mathematically, delaying the RMD and then lowering the annual amount savers must take out will result in larger account balances.
However, when stepping back to look at the big picture we must consider that the SECURE Act took away the “stretch IRA” for non-eligible beneficiaries.
Before the SECURE Act, when your children inherited your IRA, they could take an RMD from that account over their lifetime, resulting in the IRA being “stretched” out with minimal tax impact. The new rules now require your children (unless eligible) to take out 100% of your IRA within a 10-year period.
Essentially, the new rules create larger balances that must come out quicker at a higher tax rate than with the old rules.
I would not be surprised one bit if lawmakers continue down the path of delaying and reducing the RMDs for the account owners to create larger and larger retirement accounts that will get clobbered by the tax man when inherited.
Jason Glisczynski is the owner and principal advisor for Silvertree, LLC. Investment Advisory Services offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC, and BCM are separate companies. Visit www.silvertreeplan.com for more information.
