Tax Reform: Ending Forced Retirement Withdrawals

As Republicans flesh out details of their tax plan, one target for reform should be the “required minimum distribution” (RMD) rules for retirement accounts. The rules generally require that people begin withdrawing from their 401(k)s, 403(b)s, and traditional IRAs at age 70½ whether they need the cash or not.

The RMD rules are misguided, and policymakers should repeal them.

In writing this study on savings, I came across a Wall Street Journal piece arguing for liberalizing the RMD rules. Accountant Ed Slott says that the “government should raise the age for required minimum distributions to at least 80—if not eliminate it altogether.”

Here are Slott’s points:

• People are living longer today than before, so the RMD rules should be updated “to more accurately reflect today’s increased longevity.”
• Many people want to keep working, but “RMDs are particularly onerous for seniors who still have employment income and don’t need to tap savings for living expenses ... No one should be forced to pull money out of an IRA while they are still working. When combined with a paycheck, these distributions can substantially increase taxable income . . . resulting in a higher overall tax bill that prematurely eats away at retirement balances.” The government should not discourage seniors from working, and the RMD rules can do that.
• Policymakers who resist tax cuts would likely oppose RMD repeal. But Slott argues, “Uncle Sam won’t be denied his cut, even if the funds are never withdrawn during our lifetimes. The income-tax bill never goes away since there is no step-up in tax basis at death with IRAs or 401(k)s, as there is with nonqualified retirement funds and other assets. Whoever withdraws the taxable IRA or other retirement funds will pay the income tax whenever it is withdrawn.”
• Slott notes that a round number such as 80 would make for simpler RMD rules than the current 70 ½. The half age thing is just one way that RMD rules are complex, as this WSJ article discusses. Full repeal of the RMD rules and penalties would be a great way to simplify the tax code.

Here is the most important issue: the RMD rules are anti-saving. By requiring withdrawals, they encourage consumption. Yet it is good for everyone when people save more. It increases financial security, reduces dependence on government, and generates larger pools of savings to support economic growth.

So repealing the RMD rules is a winner. Simpler tax code. Support for thrift, saving, and continued earning. Greater flexibility in retirement finances. More freedom with less government rules.

For a further discussion of the RMD rules see here and here.

For more on spurring savings with tax reform, see this report on Universal Savings Accounts.