It’s human nature to complain about constraints on our freedom mandated by Congress. Required Minimum Distributions – RMDs – are no exception.
But if you’re going to have a problem, the RMD has to rank as one of the best. For one thing, it means you’ve lived past your 70th birthday, which is a good thing. It also means you’ve lived past your 70th birthday without going broke, also a good thing. And, finally, if your RMD is so large that it changes your tax rate or pushes you into higher Medicare premiums, well, millions of retirees would happily trade their problems for yours. If you are one of the few with excess cash, no law says you must spend your RMDs. You can simply pay the taxes due and reinvest the remainder.
Most of us, however, will spend these withdrawals at the grocery store. The GAO reports that 41 percent of Americans between 55 and 64 have no money saved for retirement; another 20 percent have less than $50,000.
Of the remaining retirees, most fall into one of two groups: those who must continue working, and those who start taking money from their retirement funds well before the mandatory age of 70. Often it’s as soon as possible after age 59.5, the minimum age for penalty-free withdrawals.
But that’s okay. Tax-deferred retirement accounts were never a tool for creating a new generation of trust fund kids. They can be a tool for the less well-heeled to develop a smart retirement plan. And they do a good job of it.
Research at the Center for Retirement Research at Boston College as well as work by researchers Wei Sun and Anthony Webb showed that RMDs are very efficient methods of distributing retirement income.
It turns out that RMDs are a simple way to prevent much of the worry associated with spending retirement savings. And that’s okay. There are plenty of other reasons to be annoyed with Congress.