Ronald Cluett Comments on New RMD Rules
When tax-deferred individual retirement accounts were introduced in 1974, they were designed for workers who were not part of a qualified plan. Later, they became available to all working taxpayers in the U.S., and since money in traditional IRAs is tax-deferred, they have become a common tax and estate planning tool.
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Ronald Cluett, Of Counsel at Caplin & Drysdale in Washington, D.C., recommends that plan sponsors look at how their plan treats RMDs, as each plan is different and the plan document might not yet have been fully updated to reflect the new rules. “What happens when someone dies? What happens when someone hits normal retirement age after leaving the company? Start there,” says Cluett.
This is important to review, even if a majority of a plan’s members will roll over to an IRA before they are forced to take RMDs from the plan. “Familiarize yourself with the terms of the plan that you’re administering, because some of the nuances of these rules may not be what you’re dealing with day in and day out,“ Cluett says. “Plan sponsors have some flexibility in which options the plan offers to participants.“
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Cluett also suggests learning the specific facts about any plan participants with questions, since there won’t be a one-size-fits-all response to many of them. In addition, he recommends that plan sponsors reach out to their service providers to understand how those providers understand and intend to apply the terms of their plan.
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The changes in the rules generally enjoy bipartisan support. They come as lawmakers recognize that people are living longer and working later in life, and that stretched IRAs can keep money out of the tax system for extremely long periods.
Despite the current confusion and the complexity, RMDs are not to be taken lightly, Cluett says. “Mistakes with RMDs can create a host of tax and legal issues for the plan and/or the participant who received an incorrect RMD, or didn’t receive one when they should have received one.”
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- Of Counsel