While 88% of high-net-worth consumers between the ages of 65 and 75 are familiar with required minimum distributions (RMDs), 80% say they will not need this money for day-to-day living expenses, according to the new “RMD Options Study” by Allianz Life.
Thirty-two percent are unsure how RMDs will impact their taxes, and 71% said they would like to use their RMD funds to purchase a financial product that could offset their taxes. Ninety-three percent believe it is very important to reduce taxes in retirement.
“For some consumers, RMDs have long been thought of as a necessary evil,” says Paul Kelash, vice president of consumer insights at Allianz Life. “The government mandates that people take them, even though many find they won’t need the money for every day expenses. So, consumers face the challenge of managing the impact on their taxes while being unsure of how to use the leftover funds.”
Fifty-seven percent want the RMD disbursement and tax payment to be automatic, so that they do not have to get involved. Sixty-three percent would like their RMD payments to improve their financial situation, and 79% would like the money to help their portfolio grow. Among those who are working with a financial adviser, 77% say they have gotten good advice on managing their RMDs.
“Different age groups within the study have different priorities for their RMDs,” Kelash says. “The 65 to 70 age group is most interested in tax-deferred growth of their RMD disbursements, and many feel unsure about how to best use their RMDs. In contrast, the 71 to 75 age cohort, who have already started taking their payments, is realizing they don’t need the additional money and are looking to leave a legacy—either to leave to family or another beneficiary like a charity. For those who are taking RMDs or preparing to do so, working with a financial professional is a key way to find a solution to more efficiently handle the taxes on their RMDs and use them in a way that works with their larger financial strategy.”
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The IRS has issued a Notice of Proposed Rulemaking related to hardship distributions from 401(k) plans.
The proposed regulatory amendments reflect statutory changes affecting 401(k) plans, including recent changes made by the Bipartisan Budget Act of 2018.
The proposed regulations modify the safe harbor list of expenses in current Internal Revenue Code Section 1.401(k)-1(d)(3)(iii)(B) for which distributions are deemed to be made on account of an immediate and heavy financial need by:
adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;
damage to a principal residence that would qualify for a casualty deduction under Section 165 does not have to be in a federally declared disaster area; and
adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.
The IRS says the latter is “intended to eliminate any delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency (FEMA) for individual assistance.”
Separately, in the notice, the IRS extended relief relating to Hurricane Maria and California wildfires provided in Announcement 2017-15 to similarly situated victims of Hurricanes Florence and Michael, except that the “Incident Dates” (as defined in that announcement) are as specified by FEMA for these 2018 hurricanes. Relief is provided through March 15, 2019.
No more suspension of deferrals or requirement to take a loan
The proposed regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need by eliminating any requirement that an employee be prohibited from making elective contributions (this prohibition would only apply for a distribution that is made on or after January 1, 2020) and employee contributions after receipt of a hardship distribution and any requirement to take plan loans prior to obtaining a hardship distribution.
In addition, the proposed regulations eliminate the rules under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances and provide one general standard for determining whether a distribution is necessary. Under this general standard, a hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution), the employee must have obtained other available distributions under the employer’s plans, and the employee must represent that he or she has insufficient cash or other liquid assets to satisfy the financial need.
The IRS says a plan administrator may rely on such a representation unless the plan administrator has actual knowledge to the contrary. The requirement to obtain this representation would only apply for a distribution that is made on or after January 1, 2020.
More available sources of money (if the plan sponsor chooses)
The proposed regulations permit hardship distributions from 401(k) plans of elective contributions, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these amounts, regardless of when contributed or earned. However, plans may limit the type of contributions available for hardship distributions and whether earnings on those contributions are included. Safe harbor contributions made to a plan described in Section 401(k)(13) may also be distributed on account of an employee’s hardship(because these contributions are subject to the same distribution limitations applicable to QNECs and QMACs).
Some rules do not apply to 403(b) plans
The IRS explains that Section 1.403(b)-6(d)(2) provides that a hardship distribution of 403(b) elective deferrals is subject to the rules and restrictions set forth in §1.401(k)-1(d)(3); thus, the proposed new rules relating to a hardship distribution of elective contributions from a Section 401(k) plan generally apply to Section 403(b) plans. However, Code Section 403(b)(11) was not amended by Section 41114 of the Bipartisan Budget Act of 2018; therefore, income attributable to 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.
Amounts attributable to QNECs and QMACs may be distributed from a 403(b) plan on account of hardship only to the extent that hardship is a permitted distributable event for amounts that are not attributable to 403(b) elective deferrals. Thus, QNECs and QMACs in a 403(b) plan that are not in a custodial account may be distributed on account of hardship, but QNECs and QMACs in a 403(b) plan that are in a custodial account continue to be ineligible for distribution on account of hardship.
Plan amendments
The Treasury Department and the IRS expect that, if these regulations are finalized as they have been proposed, plan sponsors will need to amend their plans’ hardship distribution provisions. The deadline for amending a disqualifying provision is set forth in Revenue Procedure 2016-37. For example, with respect to an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List that includes the change.
The Notice of Proposed Rulemaking is scheduled to be published in the Federal Register on November 14, 2018, and comments are due within 60 days of that date. Text of the notice is here.