What's wrong with raising RMD age to 75? Let's count the ways, say retirement experts

The proposed increase of the required minimum distribution age from 72 to 75 inspired a spirited debate on Twitter as retirement experts weighed in on the issue.

House Ways and Means Committee Chairman Richard Neal, D-Mass., said on April 15 that he’ll be moving through his committee “in the next few weeks” the Securing a Strong Retirement Act of 2020, commonly called Secure Act 2.0, which includes the proposed RMD age change.

“Affluent retirees do love to hate their required minimum distributions, but delaying RMDs to age 75 is truly a solution in search of a problem, IMO,” Christine Benz, director of personal finance at Morningstar, tweeted.

“There are so many things wrong with delaying RMDs,” Michael Finke, retirement professor at The American College of Financial Services, tweeted in response.

“RMDs are progressive,” he argued. “They incent retirees to spend dollars that taxpayers paid to shelter. They provide a flexible spending rule. The industry knows delaying RMDs means more money stays in accounts. And rich retirees hate them.”

Elaborating on his comments, Finke told BenefitsPRO’s sister publication ThinkAdvisor by phone on Friday: “RMDs exist so that the government can get part of their tax money back that they have subsidized. The whole purpose of 401(k) plans — of the whole defined contribution system — [and] the reason that we spend $150 billion every year to subsidize it is to help people live better in retirement.”

If retirees “never spend the money — if they simply pass it on to the next generation — then why did we spend all that money to improve your retirement security?” he asked rhetorically.

“When we delay RMDs, all we do is we defer the removal of those assets from those publicly subsidized accounts,” he explained. “So we provide an additional subsidy so that you can keep that money in there,” in the case of Secure Act 2.0, for another three years. “You’re placing that burden on taxpayers in order to allow retirees to wait a few more years before they start pulling the money out of these accounts.”

There is, however, an “upshot” to RMDs, he pointed out, saying “they’re accidentally a very efficient way to withdraw money from your IRAs.”

Accidentally because “they were really constructed as a way to encourage workers to pull money out over the course of their lifetime and it’s actually a very good method for pulling money out of your IRA because it takes two pieces of information into account: your remaining expected longevity and the amount of money that you have in your IRA balance,” he explained.

“That’s actually a more efficient way to create a drawdown from your retirement savings than the 4% rule,” he added.

Tax-deferred, not tax-free

“Nobody likes taking RMDs,” Aron Szapiro, head of policy research at Morningstar, told BenefitsPRO’s sister publication ThinkAdvisor. After all, “these are tax-deferred, not tax-free, accounts.”

Raising the age to 75 “doesn’t matter for many” retirees — “but it matters to others that have significant resources,” Szapiro said.

As far as whether it makes good economic policy to raise the age, “we can’t make an assessment as to whether the effect on the federal budget is ‘worth it’” or not, according to Szapiro. “We kind of stay out of these fights,” he said, noting he doubted that the change would happen.

But if it does pass Congress, he suggested that advisors tell their clients they now “have more flexibility — it doesn’t mean that you shouldn’t take any money out but you can delay longer” if you want to.

It also “probably changes the calculus on sequencing strategies, like if you had a significant amount in a Roth” — but it “would depend on the client obviously,” he explained. The advisor would have to do the analysis for each client to see what makes the most sense, replacing the age 72 with 75 for modeling purposes, he added.

A boon for the wealthy

An RMD change from 72 to 75 would be good news for advisors and their wealthiest clients, but it wouldn’t do much to help other retirees and isn’t exactly a great idea from a tax policy point of view, according to Jeffrey Levine, a CPA who is Buckingham Wealth Partners chief planning officer.

Like Szapiro, he said advisors should “reevaluate” each client’s income plan if there is a change to age 75 and determine when it’s best for them to pay their taxes, when Roth conversions should be done, or see if it would make sense to do more capital gains harvesting or take other steps.

“I understand the premise here — that people are living longer [so] let’s push back” RMDs and give retirees “more control,” he told ThinkAdvisor in a phone interview Friday. But this is only an issue for about 20% of people because most people already take out the required minimum amount or more annually, he explained. That’s “because they need the money to live on” — or they don’t even have a retirement account to begin with, he said.

A delay of three years, therefore, would only be “giving a pretty significant break to the wealthiest and most fortunate of taxpayers” who already have more than enough money to live on without withdrawing money from their retirement plans, he said.

Levine also rejected the argument by some that they shouldn’t have to pay taxes on the money because people probably already got a tax break of some sort in order to get the money into that retirement account, he said.

What would make more sense than a three-year delay is eliminating RMDs for those who have $50,000-$100,000 in their retirement plans, he argued.

Either change would be “great for advisors” because it’s another opportunity for them, he noted. Changes like these are “always good for advisors because clients always then need the advisors to step in and explain” it all to them and suggest what they can do that would be in their best interest, he added.