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Federal Taxation

[Author Name(s), First M. Last, Omit Titles and Degrees]

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The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs.

The article is written by Jacob A. Mortenson, Heidi R. Schramm, and Andrew Whitten which discuss the rules of Required Minimum distributions and their effects on retiree's behaviour towards decumulation of their IRA assets.

RMD is a policy which limits the wealth accumulation in IRA accounts and prevents the tax-advantaged assets to pass on to the generations. According to this rule, individuals are required to withdraw a certain fraction from their IRA, each subsequent year when the account holder turns 70½ of age. This step was taken because, there is a delay on taxes if the wealth is accumulated in the IRA, to encourage savings.

The elasticity of withdrawals from IRA concerning RMD ranges between 0.21-0.59 which implies that a 10 per cent increase in RMD leads to 3-6 per cent increase in IRA withdrawals. Account closure is substantial in response to RMD rules and is consistent with adjustment costs in compliance with RMD rules, which are same regardless of the account size but the rate of withdrawal varies with each increasing year of age ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"72RLtnk0","properties":{"formattedCitation":"(Mortenson, Schramm, and Whitten 2019)","plainCitation":"(Mortenson, Schramm, and Whitten 2019)","noteIndex":0},"citationItems":[{"id":228,"uris":["http://zotero.org/users/local/55bqtMd8/items/L3ZPQIID"],"uri":["http://zotero.org/users/local/55bqtMd8/items/L3ZPQIID"],"itemData":{"id":228,"type":"report","title":"The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs","publisher":"Social Science Research Network","publisher-place":"Rochester, NY","genre":"SSRN Scholarly Paper","source":"papers.ssrn.com","event-place":"Rochester, NY","abstract":"We study the effects of Required Minimum Distribution (RMD) rules on the asset decumulation behavior of retirees with Traditional Individual Retirement Arrangements (IRAs). Using a nationally representative panel of 1.8 million IRA holders from 2000 to 2013, we estimate that around 50 percent of individuals would prefer to withdraw less than their required minimum. However, we also estimate that up to 38 percent of these RMD-constrained individuals did not respond to a temporary suspension of RMD rules in 2009.The online appendix for this paper may be found at https://papers.ssrn.com/abstract=2859088.","URL":"https://papers.ssrn.com/abstract=2764435","number":"ID 2764435","language":"en","author":[{"family":"Mortenson","given":"Jacob"},{"family":"Schramm","given":"Heidi"},{"family":"Whitten","given":"Andrew"}],"issued":{"date-parts":[["2019",7,1]]},"accessed":{"date-parts":[["2019",10,8]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Mortenson, Schramm, and Whitten 2019). The calculations suggest an unanticipated downward trend in consumption from traditional IRAs. Individual behaviours are intended for precautionary saving.

Keeping in mind the precautionary behaviours of account holders, the author suggested some amendments in RMD rules. First of all, the increase in withdrawals up to 6 per cent accelerate the tax revenue collection on IRA contribution and investment earnings, which results in reduced RMD tax expenditure, and drop down the overall benefits of saving in IRAs. Secondly, he suggests the increase in age for the first withdrawal to adjust with horizontal equity with the pension system. At last but not the least author gives his opinion that the effects suggested changes would be concerted among the individuals who may have higher incomes, and they are not relying on their IRA assets to back their retirement consumption.

The Real Estate Trade or Business Exception from IRC Section 163(j)

The article is written by Yoram Keinan in which he discussed up to which extent the taxpayers engaged in real estate business are affected by the consequences of Internal Revenue Code (IRC) section 163(j). The author pointed out several actions, treated by the courts under Internal Revenue Service "real estate trade or business" under section 469 and should equally apply to section163(j). According to 163(j) interest that is not deducted in the current year will be carried forward to next year, and considered as business interest expense ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"dQBLzM5N","properties":{"formattedCitation":"(Keinan 2019)","plainCitation":"(Keinan 2019)","noteIndex":0},"citationItems":[{"id":229,"uris":["http://zotero.org/users/local/55bqtMd8/items/5WB273ES"],"uri":["http://zotero.org/users/local/55bqtMd8/items/5WB273ES"],"itemData":{"id":229,"type":"article-journal","title":"The Real Estate Trade or Business Exception from IRC Section 163 (j)","container-title":"The CPA Journal","page":"63-65","volume":"89","issue":"8","author":[{"family":"Keinan","given":"Yoram"}],"issued":{"date-parts":[["2019"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Keinan 2019).

The proposed regulations treated Trade and business as same under IRC section 162. The author states that to determine the limitations of section 163(j) taxpayers must identify the tax items under exempted or non-exempted business heads according to the rules of allocations provided in 163(j). However, the real estate business is not treated as trade or business under this section.

The qualification of the taxpayer for being a real estate professional needs to follow the two basic conditions. Firstly, taxpayers should materially participate in the real property trade for more than one half. Secondly, he should perform a minimum of 750 hours service during the taxable year.

The issue arose when it comes to real property brokerage trade. There is no guidance on whether the real estate agent is engaged in brokerage trade or not. The definition of the brokerage was reviewed by the tax court, which outlined five major activities for the business of real estate broker. These activities include sale-purchase, renting, leasing and contract negotiation. Many other professional services are provided in connection with real estate business includes agents, accountants, appraisers, attorney and brokers. These services should be treated under real estate business head for purposes of IRC section 163(j). However, mortgage brokers are not exempted under this head. CPAs should instruct their clients who offer such services accordingly.

Reflection

In personal, I agree with the opinions of all the three writers. they are very clear in understanding the issue discussed in the article, as well as aware of all the RMD rules, but none of them has given the critical analysis of the paper. I have gone through the paper in detail and found some lacks from the author in giving his analysis on the estimations. First of all, the author has not provided any supporting reason about how marital status is important for determining the effect of RMD on IRA withdrawals. In my opinion, being a filer or non-filer has nothing to do with the marital status.

Secondly, I see the individual-level RMD depends upon consumer behaviours to avoid taxation. I think that the author should include this major factor in his estimation. There is no evidence on why Older IRA holders were RMD constrained. The author did not give reasons for one of the major findings, that traditional IRA was not used by the holders to finance consumption, and why they preferred to save in IRAs as precautionary saving even though, they would be taxed more if they do not withdraw.

Thirdly, none of the writers points out that there is no clarity on the author's implications suggested the policy. he has not given the solution for the issue that RMD hasten the tax revenue collection and reduce the tax benefits of saving in IRAs. The author suggested an increase in starting age for RMD, whereas he told in the introduction section that 70 ½ is the benchmark set in 1962 because it is the average age at that time. Point to be noted is that the average age in recent time is less than 70, so there is no need to increase the starting age for RMD.

Overall the article is written in a synergetic way. Most of the aspects are covered, except few. I agree with concluding remarks by one of the writers that IRA's are essential to the elderly American population because it helps in tax deferment however the problem arises when these assets are inherited to the next generations. though RMD rules are detrimental to them making their desired withdrawals from IRAs. But as the writers suggest that RMD is the minimum amount a person must withdraw from IRA to avoid tax consequences. The retiree can maintain more than one account. If a person has more than one account, he has to make withdrawals from every account, in this way he/she can withdraw their desired amounts.

One of the writers very well described the rules of RMD in precise steps, the first step is to write a note the account balance on 31st December, previous year, then find distribution factor from the table divides the account balance by distribution factor.

Writers have professionally summarized the estimations through facts and figures in a simple way, which makes it easy to understand the results and findings. One of the writers gives his opinion that policymakers may also be cautious of getting rid of the minimum because doing so may reduce the overall tax expenditure. Perhaps yes, it is one of the reasons that amendments in RMD would only be concentrated on those with higher incomes, and they are not depending on their IRAs for their future consumption expectations.

References

ADDIN ZOTERO_BIBL {"uncited":[],"omitted":[],"custom":[]} CSL_BIBLIOGRAPHY Keinan, Yoram. 2019. “The Real Estate Trade or Business Exception from IRC Section 163 (j).” The CPA Journal 89(8): 63–65.

Mortenson, Jacob, Heidi Schramm, and Andrew Whitten. 2019. The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs. Rochester, NY: Social Science Research Network. SSRN Scholarly Paper. https://papers.ssrn.com/abstract=2764435 (October 8, 2019).