Most folks with a qualified retirement plan account – 401(k), 457, 403(b), IRA – know about the required minimum distribution rules that force account holders to begin taking distributions (in most cases) no later than the year they attain age 70½. Currently, it appears that the government is looking at potential changes to these rules, at least with respect to 401(k) accounts.
The existing rule is intended to serve the purpose of these accounts, which is helping retirees fund their retirements. At the same time, it allows the IRS to finally capture some of those taxes which were previously deferred, although often at lower rates than applied when the deferrals were originally made. So we know immediately that any extension or limitation of the existing rule will reduce the anticipated tax revenue by pushing it to a future, unknown time.
Not surprisingly, advocates for the change suggest the current rules are unfair as they force account holders to withdraw funds instead of being able to let them grow longer. That argument suffers from two major flaws: contributions were made with the expectation of withdrawals under the existing rule and there is nothing that says wealthier account holders need to spend their withdrawals – they can certainly reinvest them to the extent they are not consumed.
Further light on this proposal comes from recent research showing that a significant proportion of account holders with smaller balances (under a quarter of a million dollars) actually take out more than the required minimum distribution. They need that money and cannot afford to leave it to grow. At bottom, this simply suggests that wealthier account holders could benefit to some extent by the additional deferral while the less fortunate will have no benefit. Is changing the rule to benefit the few really where we need to be spending our energy and time?