The president is proposing a key change with respect to tax regulations for IRAs and retirement plan accounts.

Section 401(a)(9) of the Internal Revenue Code requires individuals to begin making taxable withdrawals from their IRAs or retirement plan accounts on April 1 of the calendar year. The withdrawals follow the later of the calendar year in which the individual turns 70.5 years of age or the calendar year in which the individual retires. The distribution amount is generally calculated by dividing the prior December 31 account balance by a life expectancy factor published by the IRS. An employee that fails to take a required minimum distribution (RMD) must pay a penalty equal to 50% of the amount not withdrawn.

The Obama administration is proposing to exempt Americans with aggregate retirement account balances of less than $100,000 from the RMD requirement. Proponents of the change argue that while the RMD requirement ensures that individuals will use their retirement funds for retirement security as opposed to bequeathing them for estate planning purposes, individuals with less than $100,000 in aggregate retirement funds have little federal estate planning opportunities and therefore ought to be exempt.

An official with the Treasury Department estimates that the proposal would only cost $40 million in annual revenue, thereby increasing its chances of becoming law. We will continue to monitor as the proposed tax changes develop.

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