Rules for IRA RMDs are Very Burdensome. Reform Them.

At our Speaker Series event yesterday on tax and estate planning and charitable giving, one important theme kept cropping up: how to manage IRAs and their unwelcome required minimum distributions (RMDs).

As we mentioned in a recent blog post, one tactic gaining in popularity for those over 70.5 is to gift a part of the RMD to charity, avoiding taxation on that portion. It’s an attractive option, considering how burdensome RMDs are from a tax planning perspective. They simply offer no place to hide unless you make a charitable donation.

Not surprisingly, given their lack of flexibility, there have been increased calls to repeal RMDs, or at least alter the rules to soften the tax burden.

Of course, there are also political points to be gained for a proposal that would give the middle class more options in tax and retirement planning. Several years ago, President Obama proposed repealing RMDs for accounts with a balance of $100,000 or less, though it gained little traction at the time. The GOP leadership has proposed a similar plan for accounts with a balance of up to $50,000. Most recently, President Trump signed an executive order in August to encourage RMD reform.

How can RMD reform be accomplished?

One strategy would be to slow the pace of required IRA drawdowns. That could be done by changing the factor used to calculate the amount of RMDs.

Another possibility is delaying the date at which RMDs must start.  According to the Society of Actuaries, the life expectancy for males has increased by 2.1 years since 2002.  Pushing the start date for RMDs from age 70.5 to age 72.5—or better yet, the simpler age 73—would help modestly.

Yet another idea would be to allow those past the required RMD age to continue making IRA contributions.

With so many proposals afloat, we hope the government will do something to ease the tax burden on retirees, though in our heated political landscape, it’s hard to foresee how the issue will play out. No matter what happens, we will keep you posted.