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Do the RMD Rules Have an Impact on Future Retirement Savings?

A component of President Trump’s retirement security Executive Order is to review the required minimum distribution (RMD) rules to see if they may be forcing Americans to make unnecessary withdrawals, leaving them with insufficient savings later in life.

In particular, the order directs the Treasury Secretary to examine within 180 days the life expectancy and distribution period tables in the regulations on RMDs from retirement plans and determine whether they should be updated to reflect current mortality data and whether such updates should be made on a regular basis.

EBRI’s IRA Analysis

Recent research by the Employee Benefit Research Institute (EBRI) shows that the RMD rules are a major factor in IRA withdrawals, which could suggest that taxpayers are taking unnecessary distributions to satisfy the rules and end up spending the money instead of continuing to save it.

According to EBRI’s Issue Brief, “EBRI IRA Database: IRA Balances, Contributions, Rollovers, Withdrawals, and Asset Allocation, 2016 Update,” the rate of those taking a withdrawal among those ages 71 and older was significantly lower among Roth owners versus traditional IRA owners. While the RMD rules only apply to traditional IRA owners beginning in the year owners turn age 70?, the data shows that only 6.2% of Roth IRA owners ages 71-79 took a withdrawal, compared with 85.4% of traditional IRA owners.

EBRI notes that comparing the RMD with the actual amount withdrawn from a traditional IRA can show whether those who have reached the required distribution age are simply following the rule or if they are withdrawing an amount in excess of the required amount.

“The report shows that in 2016, 22.7% of those ages 71 or older were found to have Traditional IRA withdrawals in excess of their required minimum distributions, meaning that over three-quarters took only the amount they were required to take,” notes Craig Copeland, EBRI senior research associate and author of the report.

The disparity between the withdrawal rates among the IRA types is due almost entirely to the RMD rules that apply to traditional IRAs but not to Roth IRAs, according to the brief.

When looking at withdrawal activity by age, not surprisingly 65.1% of the individuals taking a withdrawal were ages 65 or older and just over half (50.4%) were ages 71 or older, while just 12.8% were younger than age 50.

For traditional IRA owners taking a withdrawal, the age distribution followed the overall age distribution, with 68.7% ages 65 or older and 53.6% ages 71 or older. In contrast, among Roth IRA owners who took a withdrawal, 41.6% were younger than age 50 and only 11.3% were ages 71 or older, the data shows.

EBRI’s brief goes on to explain that the fact that RMDs are such a “material force” in IRA withdrawals has important potential policy implications. It asks whether retirees are using RMDs as a “rule of thumb” for the amount that should be withdrawn from their IRAs or do retirees prefer not to spend their assets and RMD rules are forcing them into drawing down when they would prefer not to?

Either way, as EBRI notes, it is essential to consider whether current RMD rules are driving optimal behavior among retirees.

Legislative Fix

Legislation introduced by Rep. Richie Neal (D-MA), the ranking Democrat on the House Ways and Means Committee, shows that there is congressional support for addressing the current RMD rules by exempting individual plan balances with less $250,000 and indexing the age 70? withdrawal requirement. 

Neal’s bill, the Retirement Plan Simplification and Enhancement Act of 2017 (RPSEA), would provide that participants are not required to comply with the RMD rules if they have a balance in their retirement plans and IRAs of not more than $250,000 on December 31 of the year before they attain 70?. The level would be indexed for inflation and subject to a $10,000 phase-out range.

In addition, the bill calls for indexing the age 70? provision. “With Americans living longer, it doesn’t seem to make good policy sense to require most people to begin spending down their retirement savings at age 70? when they could live another 20 years or more,” Neal asserts, adding that the RMD age threshold has never been indexed.