FA Magazine July/August 2021 - Page 14

frontline the Case for Eliminating rMDs

required minimum distributions have been a bugaboo for retirees for decades and they ’ ve been a major element of retirement , tax and income planning , but now retirement account and tax expert Ed Slott is arguing they should be done away with .

The minimums are no longer helpful to retirees or to policy makers who want to ensure that taxes are paid on retirement assets , said Slott , the president of Slott and Company . He made the comments during a presentation at Financial Advisor magazine ’ s recent “ Next Chapter — ReThinking Retirement ” conference .
“ Right now [ RMDs ] are just basically an annoyance and nuisance for seniors ,” said Slott , echoing a comment he had made earlier in the day on CNBC . “ They ’ re a good way to keep seniors crotchety for the rest of their lives . If they got rid of them , the government would get all of their money anyway .”
He noted 2019 ’ s SECURE Act , which eliminated the “ stretch IRA ” strategy for inherited traditional retirement accounts . Thanks to that law , only eligible designated beneficiaries — heirs identified on an IRA ’ s beneficiary paperwork who meet certain criteria — can stretch the required minimum distributions from an inherited traditional IRA over their own life expectancy .
For most designated beneficiaries , a new 10-year rule applies , stating that they must exhaust or withdraw the assets from the IRA and pay income taxes on them before the end of the 10th year after an account owner dies .
Thanks to that change , policy makers now have more certainty that taxes will eventually be paid on tax-deferred retirement assets , making the tax receipts from required minimum distributions during the original
“ Eighty percent of the people subject to rMDs end up taking more than the rMD each year anyway because they need the money .”
— Ed Slott account owner ’ s life less relevant , Slott said .
Critics say that new retirement legislation , colloquially deemed SECURE Act 2.0 , would gradually raise the age at which RMDs begin from 72 to 75 . This would be the second increase in the distribution start age in recent years . The original SECURE Act raised the age from 70½ to 72 .
“ Every time they have one of these transitions it creates a problem of explaining it to clients ,” said Slott .
He questioned the necessity of required minimum distributions from retirement accounts .
“ Eighty percent of the people subject to RMDs end up taking more than the RMD each year anyway because they need the money ,” he said . “ So let ’ s just kill the RMDs . Raising the age won ’ t help people who need the money anyway . That ’ s 80 % of the people who will still take the same amount or more anyway .”
If required distribution dates are pushed back by new legislation , Slott counseled advisors to consider having their clients take the distribution anyway or engage in Roth IRA conversions to pay taxes on those assets now while their effective tax rate may be lower .
Using Roth IRA conversions may also help to rescue any plans that used the traditional IRA beneficiary process as part of an estate strategy , said Slott , who added that raising the RMD age to 75 would also offer more time to convert assets to a Roth .
“ You might want to work with clients , take RMDs and do more Roth conversions to smooth out the tax bill ,” he said . “ Let ’ s say they do raise the RMD age to 75 — maybe don ’ t wait until 75 . Look at what the IRA balance might be . If it ’ s significantly larger , your client might get hit by giant RMDs and giant tax bills very late in life . The policy change might sound good , but I think it ’ s up to advisors to say it might pay off long term to take a little out every year , even if you don ’ t have to .”
— Christopher robbins
10 | FINANCIAL ADvISoR MAgAzINE | JULY / AUgUST 2021 www . FA-MAg . CoM