Recently, there has been renewed interest in changing some of the rules relating to the required minimum distributions from qualified retirement plan accounts such as 401(k)s and IRAs. Changing the beginning date is high on the list and for some good reasons. First, confusion with the current beginning date tied to one’s reaching age 70 ½ and the actual due date of that first RMD is common and really unnecessary. Second, longer life expectancies and potentially later retirements would be consistent with a later required beginning date.
However, there are some strong arguments against this change, including the basic one: the government, to encourage saving for retirement, has allowed deferral of income tax on money saved for that purpose. The quid pro quo of course, is that at some point the saver needs to pay the tax on that money and the government will always need more tax revenue. Why should that be delayed further?
Another argument against the change is that most taxpayers will need to be withdrawing funds from their qualified accounts – and paying taxes – to fund their retirements. Changing the date for required distributions to begin won’t have much impact on them.
It is, not surprisingly, the wealthier taxpayers who will benefit the most from the proposed change and who need that benefit the least. One proposal to address that issue is to eliminate the stretch – allowing beneficiaries to withdraw over their own life expectancy after the saver has died leaving a balance in the qualified plan – and require immediate taxation of the account balance. This would encourage savers to spend their retirement money as intended: for their retirement.
As always, an interesting dilemma for the legislators who typically may be counted on to not think things through and pass legislation that is less effective than intended due to unforeseen but not unforeseeable consequences.