Retirement Planning

What Does Trump's Latest Executive Order Mean for Your Retirement?

What Does Trump's Latest Executive Order Mean for Your Retirement?

What Does Trump's Latest Executive Order Mean for Your Retirement?  

Last week, President Trump issued an executive order concerning retirement accounts that has had people wondering about the fate of their financial security, given that financial firms have shown support for this order.

The executive order is not changing anything with respect to the performance and management of your accounts. Contribution limits are still set by Congress every year. Rather, there are two key components to it: raising the age where you are required to withdraw money from your IRA or 401(k) account, and increasing access to employer-sponsored retirement plans by making it easier for small businesses to offer them.

Changes to the Required Minimum Distribution (RMD) Requirements

When you have a traditional IRA or 401(k) plan, where contributions are made with pre-tax compensation, you are subject to required minimum distributions (RMDs) when you reach age 70½. You can start withdrawing from these plans at age 59½ without being subject to early withdrawal penalties from the IRS, but you are legally mandated to make withdrawals at 70½, or else you'll face incredibly steep penalties equaling 50 percent of the RMD calculation in addition to taxes. This is because the account is not designed to grow in perpetuity and your contributions were pre-tax, so they also have to be taxed at some point. Your RMDs are then calculated based on the account balance at age 70½. Retirement assets like Roth IRAs and Roth 401(k)s, however, do not have RMD requirements since those contributions are made with money that was already taxed.

Americans are living longer than they used to, and more older people are postponing full retirement, so the mandate to start receiving distributions at age 70½ doesn't make as much sense in the 2018 economy. The Treasury Department has until March 2019 to decide on a new RMD age; the Chamber of Commerce has suggested 75; and financial firms like BlackRock have expressed support for this change.

Numerous news outlets are reporting "raising the retirement age," but this does not mean you are mandated to keep working after age 70½, rather, that you will have the option to let your retirement assets grow. Should the age limit for RMDs be increased, all it means is that you will have additional time to let your traditional IRA or 401(k) assets grow. You'll still be able to make contributions and receive employer matches, including catch-up contributions at the after-55 rate. You can also commence your retirement income at any time.

Increasing Access to Retirement Plans

Not all workers have access to a retirement plan, particularly if they work for a small employer and/or have more itinerant forms of work. The Department of Labor has also been given until March 2019 to decide on relaxing regulations concerning retirement plans for employees of small businesses, part-time workers, freelancers, entrepreneurial workers and other people normally left out of employer-sponsored plans that offer more robust wealth-building opportunities than IRAs do.

The proposed plans include the formation of MEPs (Multi-Employer Plans, also called "Association Retirement Plans," which some states currently allow). Currently, regulations and costs of plan administration hamper small business owners and sole proprietors from setting up these plans and offering stable retirement benefits to their employees as a result. With the establishment of MEPs, hundreds or thousands of small businesses and self-employed individuals can participate by pooling the administrative costs with financial firms. The goal is to help previously disenfranchised workers make larger retirement plan contributions with matches that they lack with IRAs.

While the order has been issued, the agencies have not actually changed regulations yet. If these changes go into effect, it will definitely reshape retirement planning if you think you'll need more time to grow your retirement assets and/or do not have access to an employer-sponsored plan and would benefit from joining a MEP.

Jon Osborn, EA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].  

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Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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