8 JOHN W. ANDERSON EXECUTIVE VICE PRESIDENT NEW MEXICO BANKERS ASSOCIATION EXECUTIVE VICE PRESIDENT’S MESSAGE VISIT OUR WEBSITE AT: NMBANKERS.COM There are three issues that I want to discuss in this article: Required Minimum Distributions, the SAFE Banking Act and StateOwned Bank Legislation. I. Required Minimum Distribution (RMD) I have done a fair amount of research on this issue. It is complicated and seems to me, much like the income taxation of Social Security benefits, to be unfair and in need of a major revision, cap or repeal. A RMD is the amount of money that must be withdrawn from an employersponsored retirement plan, traditional IRA, SEP, or simple individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age. In 2020, the age for withdrawing from retirement accounts changed from 70 ½ to 72 years old. You must therefore begin withdrawing from a retirement account by April 1 following the year account holders reach age 72. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation. Why do we have RMDs? The argument is that the RMD acts as a safeguard against people using a retirement account to avoid paying taxes. Required minimum distributions are determined by dividing the retirement account’s prior year-end fair market value by the applicable distribution period or life expectancy. A friend explained that the RMD was enacted to keep the wealthy from accumulating taxdeferred wealth in their IRAs and then passing accumulated IRA balances to designated beneficiaries who could use their life expectancies to determine the required payouts and thus substantially postponing the payout of income tax. It impacts many seniors by requiring them to sell equity and/or fixed income assets in a down market, for example, which causes potentially large economic losses just to make taxable distributions. If the RMD were waved during the down market, there will likely be less depletion of the corpus of their account at the very least until the market improves. Again, my friend describes the enactment of the RMD as using “a howitzer to kill an ant.” An example of how the RMD works: Hank, an account holder, age 74, has a birthday on October 1. Hank’s IRA is valued at $225,000 and had a balance of $205,000 as of December 31 of the previous year. The distribution factors from the relevant IRS table are 25.8% for age 74 and 22.9% for age 75. So the minimum distribution for Hank is: RMD=$205,000/22.9=$8,951.97. Therefore, Hank has to withdraw a minimum of $8,951.97 and pay federal and state income tax on that amount. It becomes even more costly in a down market when Hank needs to sell an asset with a fair market to get $8,951.97 and the $8,951.97 is further reduced to state and federal tax. If Congress would, at the very least, exempt the RMD IRAs with a fair market value of $1.5 million – the RMD would kick in on IRAs of more than $1.5 million, but the first $1.5 million would be tax exempt. Believe it or not, Congress has been working on retirement plans during There are three issues that I want to discuss in this article: Required Minimum Distributions, the SAFE Banking Act and State-Owned Bank Legislation.
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