Everyone with a retirement account should keep an eye on 70½. That's the quirky age when investors typically must start pulling money out of Individual Retirement Accounts and workplace 401(k)-style plans – or face the consequences.
There are exceptions, such as if you're still working and participate in a 401(k) program, but the general rule is to start making withdrawals after hitting 70½. Failure to pay heed can mean a 50 percent tax penalty on the amount that was supposed to be withdrawn but wasn't.
President Donald Trump recently ordered a review of RMD rules, specifically asking the Treasury Department to consider adjusting the amounts that people must withdraw each year after hitting 70½. It's one of several actual or potential tax changes or revisions Americans should be watching.
The "required minimum distribution" rule that kicks in after 70½ applies to tax-deferred accounts including traditional IRAs and 401(k) plans on which people paid no taxes when they contributed money and haven't yet paid taxes on accrued earnings.
The rules are designed to "make sure that these plans are used to fund the owners' retirement rather than the heirs' inheritance," Richard Kaplan, a law professor at the University of Illinois, said in a recent commentary.
The RMD rule doesn't apply to Roth IRAs, as these plans are funded with after-tax contributions. Roth withdrawals can be delayed until the account owner's death.
After hitting 70½, investors with traditional IRAs and 401(k) plans must pull out a portion of their account and pay taxes on the proceeds. The yearly withdrawal amounts, based on a government life-expectancy schedule, rise each year, meaning higher and higher distributions.
Trump has ordered the Treasury Department to review that schedule with an eye on lowering the required withdrawal amounts to reflect slightly longer life expectancy. That would result in slightly smaller yearly required withdrawals.
Many account owners, upon reaching 70½, are finding that they don't yet need to live on money withdrawn from their accounts.
Kaplan thinks a review of this policy also could lead to a new age for starting RMDs – something he considers much more critical. The triggering age of 70½ was established in 1982 and should be increased, in his view.
"Adjusting that age for the increase in life expectancy since then would bring it closer to 75 years old," he said.
Ed Slott, a retirement plan expert in suburban New York City, also favors boosting the starting age to 75, if not higher. "That would be great, the better way to handle (increased life expectancy)," he said.
The Treasury Department can change the yearly schedule but not the starting age for mandatory withdrawals without Congress' approval. Kaplan doesn't think that's likely to happen before midterm elections in November but he considers it a possibility after that.
Other retirement changes
Separate from Trump's executive order on mandatory withdrawals, Congress passed legislation in late September, the Family Savings Act of 2018, that also could change some of the rules regarding IRAs and age 70½.
This bill, if it becomes law, would exempt people with small retirement balances from having to make RMD withdrawal calculations and deal with possible penalties. People with less than $50,000 in combined retirement-plan assets would be able to withdraw money whenever they wanted and in whatever amounts, Slott said.
A related provision from that legislation would allow people to contribute money into IRAs past age 70½. Currently, that's not allowed. It would apply only to those individuals who continue to work beyond that age, as earned income still is required for making IRA investments.
The Internal Revenue Service continues trying to educate the public about the considerable changes brought about by last year's tax-reform legislation – and for good reason. Reform was supposed to simplify tax-return preparation, but a review of the rules just involving itemized deductions shows that hasn't been the case.
The government expects fewer people will itemize, instead taking the standard deduction, which was nearly doubled to $12,000 a year for single taxpayers and $24,000 for married spouses. Personal exemptions, meanwhile, were discontinued.
Among itemized deductions that were retained, you may continue to write off charity contributions. So too for medical and dental expenses that exceed 7.5 percent of income in 2018 (there's no such medical deduction limit on Arizona state returns).
State and local income, sales and property taxes remain deductible but only up to $10,000 in total, for both singles and married couples. Gambling losses are still deductible up to the amount of winnings.
Itemized deductions that are no longer allowed include job-related expenses and other miscellaneous deductions above a 2 percent AGI floor. Moving-expense deductions also are out (except for active-service military personnel).
Deductions for home-mortgage interest are tricky, partly because of timing and partly because this tax break isn't based on the amount of interest paid but, rather, the debt tied to it. For mortgages incurred after Dec. 15, 2017, this deduction, in general, is limited to interest on up to $750,000 of debt incurred to buy a home.
Meanwhile, interest on home-equity debt remains deductible if you use the proceeds to buy, build or improve a dwelling, such as by remodeling. Interest isn't deductible if you spend the proceeds to pay down credit-card debt or splurge on a car or big vacation.
More privacy on tax transcripts
If you need to review your tax information from a prior year, you might want to request a free tax transcript from the IRS. These are summaries showing various information listed on your return, including adjusted gross income and numbers from forms and schedules.
"Tax return" transcripts show information as you filed it, without any later changes. "Tax account" transcripts show basic information plus any changes made later. Mortgage and student-loan lenders might accept the information on a transcript rather than requiring a copy of the full return. You can order transcripts by filing Form 4506-G with the IRS.
The IRS has revamped its transcript formats with an eye on protecting taxpayer identities. The new formats still display relevant income and tax information but redact sensitive information such as a taxpayer's full name, Social Security number, Employer Identification Number, address, phone number and more.
The idea is to make it harder for criminals to impersonate taxpayers and file fake returns in their names.
The new forms will display only the last four digits of Social Security numbers, the first four characters of a last name and other truncated information.
Reach Wiles at email@example.com or 602-444-8616.