Tax Advice for the President-Elect
Trump has an important RMD decision to make for himself this year and could provide some much-needed tax reform for the rest of us, writes columnist Natalie Choate.
Dear President-Elect Trump,
Here is some unsolicited advice regarding retirement benefits tax planning--for you and for the nation.
For You Personally
2016 is the year in which you won the presidential election, but even more important, it is the year in which you reached age 70 1/2. So 2016 is the first "Distribution Year" (year for which a distribution is required) for your IRA.
You've had important choices to make this year: Who will be your cabinet members, for example, but also whether to take your 2016 RMD this year (2016) or postpone it until April 1 of 2017 (your age 71 1/2 year). This first-RMD-year (2016) is the only year you will have any choice on that. Starting with next year's RMD, every year's RMD must be paid in that calendar year.
I recommend that you first consider using one or more qualified charitable distributions (QCDs) to satisfy your 2016 RMD if that is consistent with your charitable giving plans. Your 70th birthday was on June 14, 2016, so you are eligible to make a QCD anytime on or after Dec. 14, 2016. See my November 2016 column for QCD details.
To the extent your 2016 RMD is not fulfilled with QCDs, I'd have recommended that you postpone taking it until 2017. That's because I presume you will be in a lower tax bracket in 2017. I'm guessing that your salary next year as U.S. president, $400,000, is less than what you got paid by your businesses this year. Also tax-law changes (proposed by you!) appear likely to lower rates next year. So postponing the 2016 RMD to 2017 seems like a good bet.
If you haven't done so already, I recommend naming your wife Melania as sole beneficiary of your IRA. Most people your age (turning age 70 in 2016) have to withdraw 1/27.4th (3.65%) of their Dec. 31, 2015, account balance for the 2016 distribution year. On the other hand, if you name Melania (turning age 46 in 2016) as sole beneficiary of your IRA for the entire year, you would be entitled to use the joint life expectancy of yourself and your more-than-10-years-younger spouse to compute your RMD. You would be required to withdraw only 1.38.6th (2.59%) of your Dec. 31, 2015, account balance. For a $1 million IRA, that would be a difference of $10,589 ($36,496 vs. $25,907).
For the Rest of Us--Much Needed Tax Reform
For a bold tax reform idea, I recommend you initiate repeal of § 72(t) of the Internal Revenue Code. That's the section that imposes an extra 10% tax on retirement plan distributions received prior to age 59 1/2. Repealing it should cause your popularity to soar with young people.
The 10% "premature distributions penalty" is intended to discourage people from withdrawing from their retirement plans prior to reaching retirement age. The theory is, the tax code gives you tax breaks to save for retirement and, by gosh, you'd better use these plans for retirement or else.