Should retirees be able to keep their money in retirement accounts longer? The Trump Administration thinks so.
President Trump wants to change how retirement plans among small business are set up, as well as the amount of money retirees have to take out each year from their retirement savings. In a recently signed executive order, the President requested the Department of Labor review regulations regarding mandated withdrawals from tax-deferred retirement accounts, such as 401(k)s and most IRAs.
The President further asked for more flexibility regarding rules that guide which small businesses can establish a collective retirement plan for their employees. Federal agencies will now work out the details of the President’s order before making a formal proposal — one that could significantly alter how Americans save and fund their golden years.
New RMD Rules
Under current regulations, individuals must start pulling funds from their retirement accounts when they turn age 70-and-a-half. Once withdrawn, the money is taxed as ordinary income.
The amount of required minimum distributions, or RMDs, is determined by dividing the account balance as of December 31 of the prior year by the individual’s life expectancy as estimated by the IRS. However, those life expectancy tables haven’t been updated since 2002. Changing the RMD to reflect longer lifespans could allow retirees to grow their savings tax-deferred for a longer period, and therefore have more money to spend during what will likely be an extended retirement.
Pre-retirees who work for small businesses with a retirement benefit may be able to take advantage of a retirement plan like a 401(k), too, if regulations are changed. The executive order also proposes permitting businesses in unrelated fields to form multiple employer plans.
Many small employers would like to offer a 401(k), but 37% told the Pew Charitable Trust that the main stumbling block was the cost to establish and administer the plan. Another 22% said their organizations lacked the resources. Those expenses could be spread over a larger number of employers if that regulation was expanded to include businesses from different industries.
The Importance of Retirement Planning
The President’s executive order brings to the forefront the importance of retirement planning — even though it’s unlikely that every proposal will be finalized anytime soon. For insurance agents, the order is a reminder of how helpful you can be to clients who are putting their long-term financial plans in order.
For example, clients who want to know how to have a steady income during retirement would benefit from the tax advantages and market downside protections offered by annuities. And, of course, no retirement would be complete without a strategy to pay for healthcare expenses. A long-term care insurance policy, for instance, transfers certain risks to an insurance company and can help preserve your client’s savings.
Although the President’s recommendation to allow small businesses to run these retirement plans has yet to become a regulation, you can still speak to small business clients about adding a 401(k) to their benefits package. Since they’re allowed to partner with similar organizations now, helping them find a like-minded company with which to run the program could be a great way to start.