The Executive Order on Retirement Savings

President Donald Trump signed an executive order Friday, August 31, that proposes asking for reviews on changing certain rules for tax-deferred retirement savings such as 401(k)s and individual retirement accounts, or IRAs. Trump signed the order during a scheduled visit to Charlotte, N.C., and asked the Treasury Department to review the rules for mandatory withdrawals from 401(k)s and IRAs. These mandatory withdrawals are better known as RMDs, and they are required in the year the owner of these tax-deferred accounts turns 70 1/2. According to the Wall Street Journal, the White House is promoting these actions to better prepare the workforce for retirement.

The executive order has tasked the Labor Department to consider permitting small businesses to join together in offering combined 401(k) plans, as detailed by POLITICO. Currently, the Labor Department does not allow unrelated small businesses to offer joint open multiple employer 401(k) plans. The executive order is requesting the Labor Department to search for ways to decrease administrative and paperwork requirements that might be prohibitive to small businesses offering savings plans.

These open multiple employer plans would supposedly help more small businesses to offer their employees savings plans because of the decreased expenses incurred if the plans are jointly administered by several businesses. As reported by POLITICO, Preston Rutledge, assistant secretary of the Employee Benefits Security Administration at the Labor Department, said “Basically, we will be trying to find policy ideas that will help make joining a 401s(k) plan a more attractive proposition for small employers.”

Currently, holders of tax-deferred retirement accounts are required to begin minimum withdrawals from the accounts beginning the year they turn 70 1/2. These RMDs are predetermined amounts in a table set by the IRS according to age and must be taken on an annual basis. The purpose of the withdrawals is for the government to start collecting the taxes owed on these accounts, which have enjoyed tax-free status until then.

According to CNBC, the reviews would be of the life expectancy tables from the IRS for the purpose of updating the tables, which may allow retirees to withdraw lower RMDs from their tax-deferred retirement accounts. These tables were last updated in 2002, and the average life expectancy has risen since then from under 77 to 78 1/2, as derived from data compiled from the Federal Reserve Bank of St. Louis and noted by CNBC.

This would be helpful to retirees because the tax hit of these withdrawals can be spread out more over a longer period of time. Taking large withdrawals can significantly increase income levels, which translates to a higher tax bracket for many. These smaller distributions can also help those who have inherited tax-deferred accounts and are taking distributions.

If the rules for open multiple employer plans are relaxed, small business owners could join with other, dissimilar small business and implement savings plans for their employees. That could help these business owners attract more skilled employees because of the retirement savings plans added to their employee benefit packages.