The Trump administration is updating life-expectancy tables governing required withdrawals from tax-advantaged retirement accounts
WASHINGTON—Retirees could take smaller mandatory withdrawals from their tax-advantaged accounts under a new Treasury Department proposal designed to adjust for rising life expectancy.
If finalized, the rules would take effect starting in 2021, reducing tax collections and letting more money accumulate in tax-preferred accounts. The change amounts to a tax cut for retirees who don’t need to tap their savings for living expenses.
According to an example in the regulations, a 70-year-old with a $250,000 retirement account would be required to withdraw $8,591 instead of $9,124. A 75-year-old with a $500,000 balance could reduce that year’s withdrawals—and thus taxable income—by about $1,500, according to Ed Slott, an accountant in Rockville Centre, N.Y., who specializes in retirement accounts.
“Everybody does a little better, except the people that have to do all the paperwork,” he said. “And they’ll do better in fees.”
U.S. law lets people put money in tax-advantaged vehicles such as 401(k) plans through employers and individual retirement accounts. In traditional plans, pretax money goes in and withdrawals are taxed at ordinary income-tax rates.
To create a retirement-savings incentive instead of an estate-planning tool, the tax law requires people to start withdrawing money starting at age 70½. A government life-expectancy table determines the annual minimum withdrawals. Thursday’s proposed update would amend that table for the first time since 2002, reducing those required annual withdrawals.
Currently, about 20% of people with affected retirement accounts take only the minimum distributions. They would be most likely to reduce their withdrawals under the new rules, according to the Treasury Department.
Those are likely the wealthiest retirees, people who don’t need to use the balance of their retirement accounts but are forced to take taxable withdrawals by the law.
The retirement income rules could change again: Congress is considering a bill to increase the age at which mandatory withdrawals start from 70½ to 72. That bill also would tighten the rules on inherited retirement accounts, requiring some heirs to take taxable withdrawals over a shorter period than under current law.
The Obama administration considered a similar update to the life-expectancy tables but didn’t get to it before the administration ended, said Mark Iwry, a senior retirement-policy official in the Treasury Department from 2009 to 2017.
The Obama administration tried to get Congress to end required minimum distributions for people with account balances below $100,000. That hasn’t become law.
Original article from the Wall Street Journal: https://www.wsj.com/articles/retirees-mandatory-ira-withdrawals-would-shrink-under-treasury-plan-11573154451