Required Minimum Distributions (RMDs): Why I’m Not a Fan
For regular blog readers, it’s no secret that there are certain retirement plan provisions which I could live without. While strides have been made over the years, in my opinion, the laws governing retirement plans remain needlessly complicated and have many unnecessary provisions.
Required Minimum Distributions (RMDs) are one of the ripest provisions for elimination or, at the very least, radical change. While I know the RMDs rules exist to prevent a tax benefit to people who wish to pass all of their assets to their beneficiaries, to me, RMDs are a classic example of a solution that is worse than the problem. Here are the primary reasons why, if RMDs disappeared tomorrow, I would throw a party:
- They’re complicated — Starting with the age (70½) at which they commence (was using 70 or 71 too simple?!), to the amount necessary to satisfy the rule (which requires an actuarial calculation), to other bizarre quirks like the distribution due date of 12/31, which can be delayed until 4/1 in the first year, as long as the second distribution is in the same calendar year as the first (say what?!).
- They target the retired elderly — As bad as the 15-year catch-up election is in 403(b) plans, at least that provision targets active workers of pre-retirement age, and NOT grandma and grandpa, who worked hard for so many years to enjoy a relaxing retirement! Well, a retirement that would be relaxing if they didn’t have to deal with nonsense like the RMD rule!
- The penalties for non-compliance are ridiculous — A 50% penalty! No, that is not a misprint. Take retirement funds out early, and participants must pay a 10% penalty - but fail to take out a relatively small amount of money in your 70s and a penalty of half will be taken! That will surely teach grandma and grandpa to violate a rule that is difficult for even retirement professionals, like me, to understand! And while the penalty can, and is often, waived, it requires retirees to take time out from their golden years to complete a complicated waiver process. Yikes!
Fortunately, it appears that Congress agrees with my assessment, as the proposed (at the time of writing) SECURE would raise the age for the earliest commencement of RMDs from 70½ to 72. However, I believe that much more needs to be done. Let’s start from scratch with regulations that address tax avoidance and make them simpler to understand and administer.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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